They say no news is good news, and in the case of 2014 this was accurate for American taxpayers. Without any significant legislative changes occurring throughout the year or predicted entering 2015, traditional estate and tax planning techniques for a low-interest rate environment prevailed. In the mid-term elections, we saw a major shift in GOP power with the Republican Party taking control of the Senate by picking up six seats from the Democrats, in addition to strengthening their grip on the House of Representatives. In 2015, we can expect to see:

  • Annual gift tax exclusions will remain unchanged at $14,000
  • Lifetime estate tax exemptions will be inflation adjusted to $5,430,000 and portability for married tax payers
  • Federal income tax rates will remain unchanged with a maximum rate of 43.4%
  • Retirement plan contributions will increase from 2014 (Please see appendix)

Planning strategies to consider before year-end
The end of 2013 brought a wave of worry that the Federal government would revert lifetime gift exemptions back down to meager $1M levels. This created a massive push to dig into tax effective estate planning strategies to capture the full $5,250,000 in 2013. With the continuation of a higher level of exemption, taxpayers still need to establish their own personalized wealth transfer approach, but can refocus on more timely strategies to reduce current income tax liabilities. In addition, low interest rates can create opportunities for effective wealth transfer for estate planning purposes. Below are some examples of strategies to effect before year-end which may be relevant to efficiently transfer wealth to younger generations and/or reduce your 2014 tax bill.

Roth Conversion
Taxpayers should consider the option of converting a traditional individual retirement account (IRA) into a Roth IRA account by year end. Income limitations that had previously prohibited high-income individuals (those with an adjusted gross income over $100,000) from completing a conversion have been suspended. Since the conversion will qualify as a “taxable event” in the year it occurs, the ideal time to convert is at the beginning of the year. This allows for the ability to undo a conversion if need be by re-characterizing. The advantageous nature of future tax-free investment growth (if distributions satisfy the “five-year holding period” criterion and certain other requirements) and no required minimum distributions during the owner’s lifetime can be utilized by a wider array of investors.

Retirement Contributions
Annual retirement account contributions are an easy way to decrease taxable income for the year. The IRS has increased these limits for 2014 (please see appendix) and this is the time to check current contribution amounts and increase if necessary to ensure full utilization of the newer caps.

Charitable Contributions
Clients can take a tax deduction for cash contributions to qualified charities of up to 50% of adjusted gross income (AGI). For charitable gifts of appreciated property, you may deduct up to 30% of your AGI. When considering charitable contributions, we highly recommend clients consider gifting appreciated securities that have been held over a year. Taxpayers can receive a charitable deduction for the full value of the securities, while avoiding the capital gains tax that would be incurred upon sale of the securities.

Donor Advised Funds
Another effective strategy we recommend is establishing a donor-advised fund to coordinate your charitable giving. A lump sum can be contributed before December 31st, the entire deduction taken on your 2014 tax return, and the gifts made after 2014.

Grantor Retained Annuity Trust (GRAT)
While not necessary for year-end planning, we recommend you consider a grantor retained annuity trust (GRAT) as an additional estate planning strategy. A GRAT is used to make gifts to younger generations with little or no gift tax consequences. A grantor establishes the trust by making an irrevocable donation into the trust and retaining a qualified income annuity from the trust for the shorter of the term of the trust or grantor’s life. The amount of the annuity is determined by the IRS’ section 7520 rate. The gift is the difference between the fair market value of the assets contributed to the trust and the value of the income annuity. Any value remaining in the trust at the end of the term, which would be any appreciation over the 7520 rate, is distributed to beneficiaries without imposing any gift tax.

Year-End Checklist for 2014

We advise clients to consider the following before year-end:

  • Annual Exclusion Gifts ($14,000 per donor, $28,000 for married couples)
  • IRA contributions (Please see Appendix. Note 2014 contributions can be made until 4/15/15.)
  • Review All Beneficiary Designations
  • Required Minimum Distributions from IRA’s and Pension Plans
  • Charitable Contributions
  • Tax-Loss Harvesting

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