Tax Planning

Tax Planning 
It’s wise to consider planning strategies that might reduce your tax bill. Some of the ideas may create a need to consider investment recommendations to rebalance your portfolio and keep it in line with your goals, risk tolerance, and time horizon. Set up a meeting with your Oppenheimer & Co. Inc.  Financial Advisor and your tax professional before year end to discuss the following ideas:

General Tax Issues

Capital Gains and Losses – Do you have a capital loss carryover from previous years? If so, you might want to consider taking a capital gain in order to off-set the loss carryover. Use capital losses to offset current capital gains or carry the loss forward until the capital loss is completely off-set by gains. Under current tax law, you can also deduct up to $3,000 in capital losses to offset other taxable income. Pay attention to the holding period of assets in order to get the most beneficial tax treatment. Assets that are held less than a year will be taxed at ordinary income tax rates when sold.

Wash Sale Rules – If you are selling a security to realize a loss, ask your Financial Advisor how to comply with the wash sale rules that govern the purchase and sale of similar investments within a 30-day period before or after the sale. Failure to comply would result in the inability to claim the loss for 2015. If you want to take a loss, but maintain your position in the security, you can avoid the wash sale by “doubling up,” or purchasing the same position as the loss and holding it for 30 days before selling the loss position. The last day of the year to accomplish this is Monday, November 30, 2015.

Alternative Minimum Tax (AMT) – Work with your tax advisor to estimate your adjusted gross income, tax rate for the year and to determine if you have AMT tax exposure. If you find that you do have an AMT liability, you may want to consider adjusting the timing of payments (accelerating or deferring income) to reduce the AMT tax liability impact.

Avoiding Net Investment Income Tax – Consider investing in Municipal Bonds as the interest is not included in the calculation for Net Investment Income Tax.

Dependency Exemptions – If you have contributed more than half of the support to an individual during the year, you may be able to claim that individual as a dependent. If you share support with another person, but neither of you can claim the individual as a dependent, it may be to your advantage to work with your tax advisor to determine how one of you can claim the deduction. 

Retirement Accounts

Funding Your Retirement Accounts – Take advantage of retirement plan deductions. You are able to make a contribution to defined contribution plans up to $18,000, and a catch-up of $6,000 if you are over 50 years old. You may make a contribution to an IRA up to $5,500, and a catch-up of $1,000, if over 50. (Contributions to an IRA may be deductible).

Benefits of a Roth IRA – A conversion from a traditional IRA to a Roth IRA may provide tax-free income in retirement. (If you are planning to leave the retirement assets to heirs, the conversion may make even more sense.) Please note that you will incur a tax liability in the year of the conversion.

After-Tax Retirement Contribution Rollover – With new guidance from the IRS, individuals may roll over after-tax retirement money to a Roth IRA where it will then grow tax-free. You no longer have to pay pro rata taxes on the distribution accounting for the percentage of the pre-tax money in your retirement plan. This is more complicated than it seems, but individuals with after-tax money in their retirement plan need to pay attention. Rules took effect January 1, 2015, but may be relied upon for distributions after September 18, 2014.

Self-employed Taxpayer Retirement Accounts – Make the most of your situation and set up a retirement plan that can be funded next year after you have determined your income. If you do not already have a solo 401(k), it must be set up by December 31, but can be funded up until April 15 plus extension the following year. A SEP does not have to be set up or funded until your tax filing deadline, plus extension next year, however.

Required Minimum Distributions – If you are age 70-1/2 or older and have a retirement plan, IRA or other qualified plan that requires minimum distributions, make sure you take the distribution before December 31. If you do not take the proper distribution, you may be subject to a significant penalty. (The first RMD at age 70-1/2 may be deferred until April 1 of the following year.)

Gifting Strategies

Annual Exclusion Gift – Consider making gifts to individuals or an Irrevocable Life Insurance Trust (up to $14,000 per donee in the current year) by December 31. You may give a joint gift with your spouse utilizing both of your individual exemptions (up to $28,000 per donee in the current year).

Lifetime Exclusion Gift – If you wish to make a large gift to one or more individuals, you may do so by utilizing your lifetime federal estate and gift exclusion. This is $5.43MM in 2015 ($10.86MM for married couples) – the largest gift tax exemption ever available to US taxpayers – and a significant opportunity to pass assets to heirs today. Any gift above the annual exclusion gift must be recognized by filing a gift tax return, but no tax will be due. Any gift tax filing will reduce your federal estate exemption. Consult with your tax advisor for assistance to determine if this strategy is feasible.

College Funding – You may want to consider gifting through a 529 plan. There is a special provision in the tax code that allows you to make five years of annual gift exclusion transfers in a single year. Using this provision, you can gift up to $70,000 ($140,000 per married couple) per beneficiary. This will remove the assets from your estate, but will allow you to retain control of the investments.

Appreciated Assets – If you wish to gift to a qualified charity, gifting appreciated assets is a way of reducing your tax burden both today and in the future. If you have owned the investment asset for at least one year and it has appreciated in value, you generally may deduct the full market value without having to pay tax on the appreciation.

Charitable Gifting – It is important to remember that for donations to be deductible, they must be made to a qualified charitable organization. Be certain an organization is a bona fide charity by requesting  its qualifying letter from the IRS. Another way to get this information is from the IRS directly by linking to IRS Publication 78. This formal IRS publication lists all qualifying organizations by name. There may be some organizations not listed in IRS Publication 78 that can receive deductible donations such as churches, synagogues, and educational organizations.

Gifting assets to a Donor Advised Fund (DAF) is a tax efficient way to donate your stock, bonds, mutual funds and other appreciated assets for charitable purposes. In the year of the contribution a tax deduction can be claimed for the full market value of the donated asset. Distributions can then be made to qualified charities of your choice over a period of years. A DAF can be funded in years when the donor has a high income and the charitable deduction will have the most impact.

Business Owners

Delay Billing – One consideration to defer income taxes is to delay sending invoices to clients until next year. You may not be in a position with your cash flow to delay receipt of income, but it may help your current tax year bill if you can. You may also be able to defer a bonus until the following year which you can pay income taxes on later rather than sooner.

Installment sale agreement – If you are selling your business in the current year, consider using an installment sale to spread out any potential capital gains and income tax among future taxable years.

Accelerate expenses – You may consider repair work, purchase of supplies and equipment, or other capital improvements in the current year to lower your tax bill. Be sure to speak with your tax advisor about the impact of depreciation on capital improvements.

Business Losses – It may be possible for an eligible small business to apply current year business losses to prior year’s returns to receive a net operating loss carryback refund.  If you had significant income in prior years, you should consider deferring income, if possible, to maximize the current year’s losses. (See Rev. Proc. 2009-26)

Retirement Plan Set Up and Contributions – Generally, you are able to make a contribution to your retirement plan at any time up to the due date (plus extensions) for filing a given tax year’s return. So considering this possibility and combining it with delaying receipt of income, you could double the tax benefits by not paying tax in the current year for income and using the income to contribute to your retirement for the current year.

Other Issues

Estimated Taxes – Double check what your estimated taxes are for the current year in order to avoid exposure to estimated tax underpayment penalties. This penalty will apply if you owe more than $1,000 in tax after subtracting your withholdings and credits, or if you did not pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. Please refer to Publication 505, and speak with your tax advisor.

Medicare – Annual Open Enrollment period starts mid-October and ends in early December. Be informed of the coverage options, as you will need to determine what is best for you and your family. Getting this choice right is important because it will affect your out of pocket costs.

This is for informational purposes only and does not constitute tax advice. Clients are strongly advised to consult with their tax advisor on any transaction consequences.

Oppenheimer & Co. Inc. (Oppenheimer) is a wholly owned subsidiary of Oppenheimer Holdings Inc., an integrated financial services holdings company. Oppenheimer Holdings Inc.'s other wholly owned subsidiaries include Oppenheimer Asset Management Inc., Oppenheimer Life Agencies Ltd., and Oppenheimer Trust Company of Delaware. Oppenheimer is a registered broker‐dealer and investment advisory firm. Securities are offered through Oppenheimer. Oppenheimer Asset Management is the name under which Oppenheimer Asset Management Inc. (OAM) does business.

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For further information about the products/programs available and their suitability for your portfolio, please contact your Oppenheimer Financial Advisor. Any discussion of securities, including any hedge funds or other alternative investments, should not be construed as a recommendation or an offer or solicitation to buy or sell interest in any such securities. Securities products offered or sold by Oppenheimer will not be endorsed or guaranteed by Oppenheimer and will be subject to investment risks, including the possible loss of principal invested. Neither Oppenheimer, OAM, nor the Oppenheimer Trust Company of Delaware provide legal or tax advice. However, your Oppenheimer Financial Advisor will work with clients, their attorneys and their tax professionals to help ensure all of their needs are met and properly executed.

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