Year End Gifts and Investments

Transcription

1 Wealth Planning Year End Tax Tips The end of every year poses a critical deadline for utilizing certain tax benefits. The following covers various items to address in your annual tax, estate, retirement and charitable planning. Income Tax Planning The consists of experts from across the Private Banking North America Business to provide you with the advice and strategies needed to develop a comprehensive wealth plan. Together with your Relationship Manager, the Wealth Planning Group can help you go beyond your investments to create a plan designed to support and protect the people and causes you care most about for years to come. Evaluate the Optimal Timing of Capital Gain Recognition The sale of appreciated assets held for a year or less results in short-term capital gain, taxable as ordinary income at a maximum federal rate of 39.6%. By contrast, the sale of appreciated assets held for over a year results in long-term capital gain, taxable at a maximum federal rate of 20%. In addition, higher income taxpayers must pay a Medicare surtax of 3.8% on net investment income. (The surtax applies when modified adjusted gross income exceeds $200,000 for single taxpayers, or $250,000 for married couples filing jointly 1 ). Given the combined maximum federal tax rate of 43.4% for short-term capital gains, as opposed to 23.8% for long-term capital gains, you may wish to review with your Relationship Manager the optimal stock lots to sell, to benefit from the lower tax rate applicable to long-term capital gain. Mutual funds often make capital gain distributions towards year-end. If you intend to sell or purchase any shares this year, you may wish to review with your Relationship Manager and tax advisor the optimal time to do so, in light of any anticipated capital gain distribution and corresponding tax liability. Harvest Tax Losses to Offset Gains Individuals with recognized gains have an opportunity to offset these gains with losses through tax loss harvesting within the portfolio. These losses may offset current year gains and reduce the overall income tax liability. The effective benefit of tax losses has increased, in light of the higher maximum federal tax rate on longterm capital gains of 20% (formerly 15%) and the additional Medicare surtax on net investment income. Recognizing tax losses may also help mitigate the tax cost of diversifying out of a concentrated appreciated position. The latest trade date to realize a capital loss for 2014 is Wednesday, December 31 st. In general, taxpayers must first match their long-term losses against their long-term gains, and short-term losses against short-term gains. They may use any remaining losses to offset any remaining long-term or short-term gains, and then up to $3,000 of ordinary income. Any excess capital losses carry over to subsequent years. Be sure to have the lots specifically identified upon selling to realize the 1 The tax equals 3.8% of the lesser of the individual's net investment income and any excess of the individual's modified adjusted gross income over the threshold amount. This document is not complete without the attached Important Disclosures. Page 1 of 5

2 desired tax result. Investors should remember that the "wash sale" rules disallow the current recognition of a tax loss upon the purchase of substantially identical stock or securities within 30 days before or after the sale. To navigate the wash sale rules, individuals may: Sell the original holding and then buy the same securities at least 31 days later. Buy more of the same stocks or bonds, and then sell the original holding at least 31 days later. (The last day to double up in advance and still recognize a loss on the original security at year-end is: Friday, November 28th.) Sell the original holding and buy similar securities in different companies in the same line of business. In the case of mutual fund shares, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy. A similar strategy may apply with Exchange Traded Funds (ETFs). Consider Exercising Employee Stock Options It may make sense to exercise stock options, especially if market volatility has temporarily depressed the value of company stock. Ordinary income recognition occurs at the exercise of non-qualified options, while Alternative Minimum Tax (AMT) liability may result upon the exercise of incentive stock options (ISOs). However, exercising options at temporarily depressed values may reduce tax liability as compared to the amount for a higher valuation. Exercising options also commences the stock s holding period for longterm capital gain purposes. Employees should consider any cash requirements for the exercise and corresponding tax liability. If individuals exercised any ISOs earlier in the year and the stock acquired pursuant to the ISOs has since fallen in value below the exercise price, they may consider selling the shares before the end of the year to avoid potential AMT (due to the original exercise of the option). Evaluate the Pre Payment of State and Local Taxes and Other Deductible Items The prepayment of certain deductible items may reduce this year s tax liability. However, since taxpayers cannot deduct state and local income and property taxes or miscellaneous itemized deductions for AMT purposes, prepaying such expenses may not necessarily reduce their tax liability. In addition, the optimal timing of deductions depends on income projections for the current and subsequent year. Therefore, individuals should work with their tax advisor before year-end in order to plan the amount and timing of certain expenses. Estate Planning The Annual Gift Tax Exclusion: Use It or Lose It The annual gift tax exclusion allows individuals to give each donee up to a certain amount each year (i.e., $14,000 for 2014) without gift tax. No limit exists on the number of donees receiving such annual exclusion gifts. Married donors may double the amount of the exclusion to $28,000 per donee. This exclusion does not carry over to subsequent years, so year-end gifting remains critical to maximize the exclusion's benefits for each year. Possible uses of the annual gift tax exclusion include: Transfers to Custodial Accounts: the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) provide convenient and useful vehicles for accumulating wealth on behalf of a minor. However, the beneficiary will receive the custodial property outright upon the termination of the custodianship i.e., upon age 18 or 21 typically, as prescribed by state law. Gifts in Trust: trusts enable grantors greater flexibility to determine the age and circumstances of any distributions to the beneficiaries. Grantors may also transfer the annual exclusion amount to irrevocable life insurance trusts (ILITs) to fund the trust s life insurance policy premium payments. However, for trust contributions to qualify for the annual exclusion, the trust beneficiaries must receive notification and the ability (for a certain period of time) to withdraw the contributed amount. Section 529 College Savings Plans: given the higher federal income tax rates in effect after 2012, section 529 college savings plans have become more popular as a tax-free vehicle to save and pay for educational expenses, without incurring income taxes on the growth or distribution (for qualified expenses). Moreover, individuals may "front-load" up to five years of annual exclusion gifts to 529 college savings plans with respect to a single beneficiary. Individuals who fund one year s worth of the annual exclusion at the end of one year may front-load an additional five years worth at the beginning of the following year, thereby contributing six years worth of annual exclusions within a short period of time. This document is not complete without the attached Important Disclosures. Page 2 of 5

3 Review Basic Documents, Estate Tax Exposure and the Gift Tax Exemption In addition to the annual gift tax exclusion, individuals may also utilize a gift tax exemption of $5.34 million (for 2014) over their lifetime (with any remaining exemption available to reduce any estate tax liability). This exemption amount remains subject to inflation adjustment going forward. Individuals may also utilize a $5.34 million generationskipping transfer (GST) tax exemption (for 2014) in transferring assets for their grandchildren s benefit. While the federal tax code does not impose a year-end deadline for utilizing these exemption amounts, they often complement the annual gift tax exclusion in comprehensive estate planning. Accordingly, the last quarter provides a useful opportunity to review your current basic documents (including your will and powers of attorney for financial and health matters), as well as the optimal use of your gift and GST tax exemptions, to ensure that they address your current goals. Depending on your projected estate tax exposure, you may wish to review your corresponding liquidity needs and insurance coverage. Since the exemption could potentially apply to several estate planning strategies, you should engage counsel to determine the optimal combination of vehicles for your goals and circumstances. Retirement Planning Maximize Retirement Account Contributions 401(k) Plans: The elective deferral (contribution) limit for employees who participate in 401(k) and 403(b) plans equals $17,500 for Employees aged 50 and over who participate in 401(k) and 403(b) plans may defer an additional $5,500 as a catch-up contribution (for a total of $23,000). Since the deferral limit does not carry over to subsequent years, employees should ensure that their elective deferrals have occurred by year-end in order to exclude them from compensation for IRAs: taxpayers have until April 15, 2015 to make IRA contributions for The limit on annual contributions to all of one's traditional and Roth IRAs equals $5,500. The additional catch-up contribution limit for individuals aged 50 and over equals $1,000 (for a total of $6,500). To ensure timely contributions, taxpayers should remember this opportunity as part of their annual yearend planning. Consider Conversions to a Roth IRA Taxpayers may consider converting their traditional IRAs (including SEPs and SIMPLE IRAs), 401(a) qualified retirement plans, 403(b) tax-sheltered annuities or 457 government plans into a Roth IRA. Roth IRAs generally provide for distributions free from income tax and the 3.8% surtax. However, converting to a Roth IRA does generate income tax liability in the year of conversion. In addition, although IRA distributions do not directly trigger the 3.8% Medicare surtax, they may increase the likelihood of incurring the surtax, since they increase the taxpayer's overall modified adjusted gross income. Accordingly, any Roth IRA conversion decision should account for the total tax liability projected for this year. Make Required Minimum Distributions (RMDs) By December 31, 2014, individuals over the age of 70½ must receive their 2014 RMD based on the December 31, 2013 balance in their traditional IRAs and qualified plans. Failures to make such annual RMD may incur a 50% penalty on the amount not withdrawn. Charitable Planning Review and Implement Your Charitable Planning The charitable deduction may help offset the tax liability from this year s income from all sources, including compensation, investments, and retirement accounts. As a result, charitable planning remains a powerful tool for reducing income as well as estate and gift taxes. Since the deadline for charitable donations falls at year-end, individuals should plan well in advance to ensure a timely transfer and a review of the optimal assets and vehicles to utilize. Implement Tax-Efficient Giving Instead of the common method of checkbook philanthropy, you may benefit from donating longterm publicly traded appreciated securities instead. Doing so enables you to donate assets with a lower cost basis and still benefit from a full fair market value deduction, without recognizing capital gain. (By contrast, the deduction amount for appreciated investments held for one year or less remains limited to cost basis.). Charitable donations of appreciated stock may also help reallocate out of highly concentrated positions without triggering any capital gain recognition. This This document is not complete without the attached Important Disclosures. Page 3 of 5

4 strategy may benefit taxpayers lacking significant capital losses to offset capital gains. Taxpayers who anticipate a taxable corporate transaction and donate shares in such company well in advance (often before the shareholder vote) may potentially bypass any capital gain recognition upon the transaction and fund their philanthropy at the same time. Charitable remainder trusts may benefit those who wish to benefit their selected charities, diversify out of appreciated long-term securities tax efficiently, and retain an income stream for themselves. Ensure a Timely Contribution Timing remains critical to claiming a charitable deduction in the desired year. In general, a charitable gift occurs upon the delivery of the donated property. Determining the time of delivery is important because: (1) it determines the tax year in which the gift is deductible; and (2) for assets that fluctuate in value such as stocks, it affects the value of the donated property. Keep in mind the following rules: Checks: delivery occurs on the date of mailing. Text message: Contributions made by text message are deductible in the year of sending the text message, if the contribution is charged to the donor s telephone or wireless account. Payment by Credit Card: contributions charged on the donor s bank credit card are deductible in the year of making the charge. Securities: for stock registered in street name, the donation occurs for federal income tax purposes upon the stock transfer into the charity s account, not when the donor issues the transfer instruction. To account for any delays in delivering the shares into the correct account, you should work with your Relationship Manager to have as much lead time as possible in processing the transfer. For example, gifts of mutual fund shares sometimes take longer than expected, so they should also be planned well in advance. Consolidate Your Charitable Activity through a Donor Advised Fund Individuals who regularly give significant amounts to various charities may benefit from a donor advised fund (DAF). DAFs enable donors to consolidate and track their charitable giving in a single, tax-exempt account. In addition, they may benefit from a current income tax deduction 2 upon funding and then take their time in researching and determining which charities to benefit. Unlike a private foundation, DAF accounts do not have to distribute 5% of net investable assets each year. In this manner, donors retain flexibility over the timing and amount of their grant recommendations. DAFs may also complement existing private foundations as a vehicle for receiving closely held stock, partnership interests, real estate investments, and other non-publicly-traded assets prior to their sale, with sufficient planning in advance. 2 In a year of high income tax liability, funding a DAF may help to significantly reduce the taxes owed. For any contribution amount exceeding the AGI-based threshold of 50% for cash and 30% for longterm appreciated investment property, clients may carry forward the excess deduction amount for the following 5 years. This threshold remains higher than the limits imposed for private foundation donations (30% for cash, 20% for long-term appreciated investment assets). This document is not complete without the attached Important Disclosures. Page 4 of 5

5 For More Information Please contact your Credit Suisse Relationship Manager. Im portant Disclosures This is provided to you by Credit Suisse Securities (USA) LLC ( CSSU ) for your information only. This is not intended to be an offer or solicitation to purchase or sell any security or to employ a specific investment strategy. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of CSSU. CSSU does not represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose or any particular investor and it should not be used as a basis for investment decisions. It is not to be relied upon or used in substitution for the exercise of independent judgment. Information and opinions expressed by us have been obtained from sources believed to be reliable. CSSU makes no representation as to their accuracy or completeness and CSSU accepts no liability for losses arising from the use of the material presented. This material does not contain all of the information that you may wish to consider and it does not take into account your individual situation or circumstances. CSSU does not provide, and nothing contained herein should be construed as, tax, accounting or legal advice; you should consult your personal accounting, tax, and legal advisors to understand the implications of any investment specific to your personal financial situation. The term "Credit Suisse" is the global marketing brand name for the investment banking, asset management and private banking services offered by Credit Suisse Group subsidiaries and affiliates worldwide. Unless otherwise specified, the term "Credit Suisse Private Banking" generally refers to the combined capabilities of Credit Suisse Group subsidiaries and affiliates that provide private banking services to high net worth clients worldwide. The term Private Banking North America generally refers to the private banking business within CSSU. Each legal entity in Credit Suisse Group is subject to distinct regulatory requirements and certain products and services may not be available in all jurisdictions or to all client types. There is no intention to offer products and services in countries or jurisdictions where such offer would be unlawful under the relevant domestic law. Private Banking North America is a business in CSSU. CSSU is a US registered broker dealer and investment adviser. CSSU and the Private Banking North America business in CSSU each is not a chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. References to the Private Banking North America business refer solely to the private banking business in CSSU. Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this com munication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved. This document is not complete without the attached Important Disclosures. Page 5 of 5