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Covestor Radio – Episode 24: Year End Giving

Posted: December 15, 2014 at 9:03 am   /   by   /   comments (0)


Kimberly Clouse, Covestor’s Chief Client Advocate and Advisory Board Chair joins Covestor Radio to discuss financial planning “to dos” to complete by year end.

Covestor Radio is a show about money milestones and investing for your future and brought to you by Covestor, an online marketplace for investing.


As we enter the final month of the year, it’s a good time to think about ways to minimize your tax burden for the year.  As always, you should talk with your tax advisor and/or estate planning attorney about your specific situation, but we’ll discuss some general guidelines.

What are some of the general areas in which our listeners can take action to affect their tax liability?

On today’s show we will discuss steps that you can take with retirement contributions, estate planning, and investments.

What do our listeners need to know about retirement contributions?

RETIREMENT CONTRIBUTIONS.  For those listeners who are able to do so, maximize contributions to your 401(k) before you receive your final paycheck of the year.  The contribution limit for 2014 is $17,500 plus an additional $5,500 if you’re age 50 or older, for a total of $23,000. And remember that income tax won’t be due on the amount deposited in a traditional 401(k) account until the money is withdrawn. An employee in the 30 percent tax bracket who is able to max out his 401(k) would save $5250  on his federal income tax bill, compared with $1,500 in tax savings for someone who deposits $5,000 in a 401(k).

Are the rules the same for IRAs?

No.  The IRS allows extra time for IRA contributions to be made.  While 401(k) contributions typically need to be made by the end of the calendar year, you have until April 15, 2015 — or in some cases October 15th — to make IRA contributions that count toward tax year 2014.  And this gives you more time to determine which type of IRA is most appropriate for you. However, if you wait until 2015 to contribute to an IRA for tax year 2014, make sure you specify with your financial institution which tax year the contribution should be applied to. Financial institutions may automatically apply contributions to the calendar year when they are received unless you indicate otherwise.

Focusing on estate planning; what are annual exclusion gifts?

ESTATE PLANNING.   Annual exclusion gifts will be of particular interest to our listeners who have large estates or whose parents have large estates.  An annual exclusion gift is a gift that qualifies for the $14,000 per person annual exclusion from federal gift taxes. Married couples can combine their annual exclusion amounts and gift $28,000 to each person, per year without incurring any gift tax liability.  Annual exclusion gifts must be made by the year.  There is no income tax benefit to making these gifts but it is a tax-free gift for estate purposes.
Even if you are not in a position to benefit from making annual exclusion gifts, if your parents have a large estate you may want to encourage them to make these annual exclusion gifts before year-end.  It can be a tricky conversation, to be sure, but one worth having.

We’ve covered retirement contributions and estate planning.  What about investments?

In brief, “tax loss harvest”.  This is one of the many areas where the “devil is in the details” and there are a number of nuances, but here’s an overview of how it works.  Sell investments that are trading at a price below what you paid for them.  Use these losses to offset any gains that you have realized in the portfolio.  And remember to consider gains that you have realized across your balance sheet, not just your investment portfolio.  Consider business and real estate investments too.  And if your capital losses are more than your capital gains this year, you can “put them in the bank”, so to speak, and carry them over to future years.  (Of course, retirement accounts like IRAs and 401ks are tax-deferred so they are not candidates for tax loss harvesting.)

Anything else of that is time sensitive on the investment front?

Be careful when buying into mutual funds in taxable accounts.  Timing matters.  If you’re considering buying or selling a fund between now and the end of the year, it’s important to know if—and when—that fund plans a distribution. The fiscal year ends on Oct. 31 for most fund companies, and they typically estimate their distributions after that date for payment sometime in December.  These distributions are based upon owning the fund on the date the distribution is declared.  If you are not careful you could be the recipient of a distribution even though you’ve only owned the fund for a short time.  You would be fully liable for any taxes due on this distribution.   This is not an issue for securities that are held in your individual name in a separately-managed account.

TIP: The holiday season is indeed the season of giving.  A number of givers fund their gifts with cash or check, and that is certainly an “easy” way to give.  However, you may want to consider making the gift with appreciated securities. In general, you will receive a tax deduction equal to the fair market value of the appreciated securities. And funding a charitable gift with appreciated securities can have a secondary benefit as well.  You can use it as an opportunity to rebalance your portfolio and reduce your exposure to an appreciated investment without paying any capital gains tax.  This strategy is only applicable to securities held in accounts on which you pay taxes.


About Kimberly Clouse

Kimberly Clouse is Advisory Board Chair at Covestor, a registered investment adviser and an online marketplace for investing.

Passionate about empowering financial consumers, Kimberly works with individuals, families and foundations to help them navigate the increasingly complex world of investment advice and make more informed financial decisions.

She previously served as Managing Director at Athena Capital Advisors and Chief Executive Officer at Hale and Dorr Wealth Advisors. Earlier in her career, she worked for United States Trust Company, J.P. Morgan and Goldman Sachs.



Note: All opinions included in this radio episode are as of [November 26, 2014] and are subject to change. The opinions and views expressed herein are of Kimberly Clouse. All investments involve risk, the amount of which may vary significantly.

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