As we get closer to the end of yet another year, it’s time to help clients tie up loose ends and implement tax saving strategies. Of course, every client has a unique tax situation, but here are some strategies to add to your year-end tax planning arsenal.
- Boost Charitable Contributions with a Donor-Advised Fund. These funds allow clients an immediate tax deduction for setting aside funds that will be used for future charitable donations. As such, they can be a cost-effective way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation. Donor-advised funds are available through mutual fund companies, universities and community foundations, and often require a minimum initial contribution of $10,000 or more. Basically, the client contributes money or securities to an account established in his or her name for which they can direct investments and recommend (on their own time schedule) grants to charities of their choice.
- Increase Capital Losses with a Bond Swap. Bond swaps can be an effective means for clients with bonds or bond funds that have decreased in value (e.g., due to an increase in interest rates or a lowering of the issuer’s creditworthiness) to generate capital losses with little impact on their investment holdings. Essentially, the client sells the bonds or fund shares and immediately reinvests in a similar (but not substantially identical) bond or bond fund. The end result is that they recognize a taxable loss and still hold a bond or shares in a bond fund that pays similar or more interest than before.
- Secure a Loss Deduction for Nearly Worthless Securities. Taxpayers can claim a loss on worthless securities, but not until it can be proven that the investment is completely worthless. This can be very difficult to establish with any certainty. To avoid the issue, clients who own securities that are all but worthless with little hope of recovery might consider selling them (assuming they have some sort of marketable value) before the end of the year. As long as the sale is not to a family member, they can claim the loss this year (subject, of course, to the normal capital loss and wash sale rules).
For more information, visit Tax.ThomsonReuters.com/Checkpoint/.