Financial planners can recommend year-end tax plays

Labor Day is an adviser’s equivalent to football’s two-minute warning. It cues a final chance to execute year-end strategies. The fourth quarter presents an opportunity to recommend tactical moves that better position the client at tax time and for the upcoming year.
In particular, advisers should look for last-minute strategies to help clients minimize tax implications, maximize corporate benefits and review homeowner coverage.
Here are some easy field goals for the end of the year.
Harvest investment losses: While you want to avoid having the proverbial “tax tail wag the financial dog,” review all investments held in a client’s portfolio to determine if losses should be taken in the current tax year. Look for funds and/or stocks that no longer fit your client’s investment profile. Also look at stocks or funds that have a three- to five-year history of poor performance. These would be prime candidates to take out of the game and offset the upcoming tax bill.
Qualified options: If your client has been granted incentive stock options, explain that by merely exercising these options, the bargain element (market value minus the strike price) will be considered a preference item and tallied for alternative minimum tax purposes. With the recent market shake-up, your clients may want to hold off exercising these options if their companies may be in a foreseeable slump. Explain to them that many dot-com employees learned this lesson the hard way. They exercised stock options early in the year only to see their company’s value drop considerably by yearend. The following April, they found themselves on the hook for the AMT because they had exercised their stock options.
Conversely, if your clients have already exercised these options yet have sold no stock, make sure they wait the required time period (two years from grant, one year from exercise) before selling. This ensures that they pay the favorable capital gains rate rather than the higher income tax rate or, even worse, have this transaction treated as W-2 income.
Charitable gifting: Remind clients to make donations if they haven’t already done so. Donations made by Dec. 31 will offset the current year’s tax bill. Emphasize that what is donated is as important as the charity receiving the donations. Also take the opportunity to remind clients that charitable deductions are “generally limited to 50% of adjusted gross income, but in some cases, 20% and 30% limits may apply,” according to Internal Revenue Service Publication 526.
Prepayments: Prepaying the January mortgage in December is a quick step to increase itemized deductions in the present tax year. Just remember that next year, they will have only 11 months’ worth of deductions unless they opt to pay January’s mortgage early once again.
Annual gifting: Although gifting to family members is not deductible, clients can take advantage of the annual gifting rule, which allows them to make gifts that are free of the federal gift tax. Every U.S. citizen can give away up to $12,000 per person per year. Additionally, a husband and wife can elect to split gifts or jointly gift up to $24,000 per person per year. This is useful for parents and/or grandparents who want to help fund Section 529 plans. Gifts of $12,000 can be made annually to the 529 plan, or a plan can be “front loaded” with an individual gifting $60,000 or $120,000 as a couple. If the client chooses the front-loading option, they will not be able to make another gift to that 529 for the following five years.
Company benefits: The fall triggers open enrollment at many employers. This is when employees can re-elect or change workplace benefits. Though these elections will not take effect in the current year, the pretax elections that they make will affect their taxes in the following year. So consider this opportunity a pre-emptive strike. The key here is to help clients understand how their elections will affect future tax liabilities. Take the opportunity to help clients determine appropriate amounts to allocate to flexible spending accounts, review insurance coverage and ensure that all tax-deferred savings opportunities through qualified plans are being maximized.
Homeowners insurance: Homeowners insurance is largely ignored by clients once it is purchased — until an emergency strikes. The fall is a good time to review insurance coverage, particularly if the secondary effects of hurricanes may affect clients.
If your client lives in a coastal region, you may need to review whether they are eligible for flood insurance. Encourage homeowners to review coverage amounts, particularly if renovations have been done to their property. A quick review and adjustment to their coverage will realign their current protection.
The months between Labor Day and yearend offer a great opportunity to tie up the loose ends of financial strategies drawn earlier in the year. Games are both won and lost after the two-minute warning. The key is to optimize the last quarter by reminding clients to achieve current goals while setting the stage for planning discussions in the first quarter of next year.
Paul McClatchy vice president of financial planning at eMoney Advisor Inc., a Conshohocken, Pa.-based provider of wealth management software.

Related Topics: Practice Management