How to Ease Your Client’s Tax Burden

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The 2012 American Taxpayer Relief Act (ATRA) and the Affordable Care Act (ACA) instituted higher rates and eliminated deductions and exemptions at high income levels, which caused many Americans to experience “sticker shock” at their increased tax obligations.

As we know, ATRA raised the top ordinary income tax bracket and increased the maximum rate on capital gains and qualified dividends. It revived and permanently reinstated the phase-out of both itemized deductions (Pease Limitation) and Personal Exemptions Phase-out (PEP). In addition to changes from ATRA, the ACA introduced the 0.9% Medicare Hospital Insurance (HI) and the 3.8% Surtax on Net Investment Income (NII). A summary of the implications of these taxes for a married couple, filing jointly, is below.

ATRA and ACA add complexity, but with smart planning, you can ease that burden for your clients. The following is a brief discussion in four different tax planning areas: 1) income management, 2) recognition of capital gains and qualified dividends, 3) charitable contributions and 4) family gifting.


Determine if income deferral or deductions/credit acceleration will help reduce your client’s tax bill or be beneficial in the future. When considering whether to accelerate or defer items of income, it is important to be confident that the strategy will maximize after-tax income for the taxpayer, not only for this year, but the forthcoming years as well. To increase deferred income, consider some of these strategies:

  • Defer billings and collections
  • Receive bonuses earned for 2014 in 2015
  • Sell appreciated assets in 2015
  • Declare any special dividends in 2015
  • Delay Roth conversions to 2015
  • Defer debt forgiveness income if possible
  • Execute like-kind exchange transactions
  • Take corporate liquidation distributions in 2015

To increase deductions and credit acceleration, consider these ideas:

  • Bunch itemized deductions into 2014/Standard deduction into 2015
  • Accelerate bill payments into 2014
  • Pay last state estimated tax installment in 2014 instead of 2015
  • Minimize the effect of AGI limitations on deductions/credits
  • Maximize net investment interest deductions
  • Match passive activity income and losses
  • Accelerate charitable giving via CRT or donor advised fund
  • Re-characterize your Roth IRA conversion


Loss harvesting helps minimize investment gains. Losses can be used, dollar for dollar, to offset realized gains and up to $3,000 of earned income. Any unused losses can be carried forward indefinitely. When a loss is carried forward it retains its character of “long-term” or “short-term,” meaning losses carried forward to the next tax year are used first to reduce long or short-term gains. One limit on loss harvesting is the wash-sale rule, which prohibits the purchase of a specific security within 30 days prior to or after the date at which the same security is sold for a loss.

Qualifying dividends must meet stock holding period requirements. To qualify for reduced qualified dividends rates, individuals must hold the stock for at least 61 consecutive days during a 121-day period that begins 60 days before the ex-dividend date. For example, if the ex-dividend is April 15th, the 121 day period begins on February 16th and ends on June 14th. This holding period applies to common stock and to stock mutual funds.

Certain dividends may not be eligible for reduced rates. Dividends used to calculate investment income, against which an investment interest deduction is taken, are not eligible for reduced rates. The taxpayer must decide whether to forego the reduced dividend rate to offset investment interest expense or keep the reduced dividend rate and carry forward any excess investment interest expense.


Know your limits. In general, there are limitations on the amount of the charitable contributions that are deductible based on the type of property being donated and whether the receiving charitable organization is public or private. The general limitations for public charities are: 50% of AGI for cash gifts, 50% of AGI for gifts of ordinary income property, and 30% of AGI for capital gain property. For private charities the general limitations are: 30% of AGI for cash gifts, 30% of AGI for ordinary income property, and 20% of AGI for gifts of capital gain property.

Leverage the value of the gift with appreciated stock. When it comes to making charitable gifts, the method many individuals think about first is writing a check to the charity. However, those owning appreciated securities may find gifting these assets to charity a better strategy, especially when compared to selling securities on which capital gains tax must be paid to generate cash for the gift. The gift (and the charitable deduction) is valued at the fair market price of the stock on the date of the gift, which may be significantly more than the cost basis.

Utilize a donor-advised fund. Increased rates coupled with appreciated securities and large unrealized capital gains make a DAF an attractive vehicle. Capital gains taxes are not paid on donated appreciated securities and appreciation within a donor-advised fund is not taxable. Additionally, contributions are tax deductible in the year made, allowing for control over timing of deductions and this can create a family wealth education opportunity.


Utilize the annual exclusion. In 2014, an individual can make gifts up to $14,000 per recipient per year, free from gift taxes. A married couple can give gifts of $28,000 per recipient per year, without exceeding the annual exclusion. To put this into context, a married couple with three children can reduce their taxable estate by $84,000.

Take advantage frontloading a 529 Plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. The donor has the option to ‘frontload’ contributions without paying a federal gift tax. A maximum of $14,000 per year can be contributed, or the donor can elect to make five years of contributions ($70,000) in one year.

Pay certain expenses directly. Unlimited payments for qualified medical and educational purposes can be made on behalf of another person without generating gift tax, enabling investors to accelerate their gifting strategies. These gifts must be made directly to the respective medical or educational institution to qualify for exclusion.

John Nersesian is managing director of wealth management services at Nuveen Investments in Chicago and the Chairman of board of directors at IMCA.

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