In the novel, Gone with the Wind, Margaret Mitchell wrote, “Death, taxes and childbirth! There’s never a convenient time for any of them!” You can say that again! Putting aside death and childbirth for the moment, the focus is once again on taxes in the run up to April 15th, 2020. Not many relish the thought of spending hours organizing W-2s, 1099s, K-1s, and charitable receipts, but it’s part of the annual tax ritual for many of our clients.
It seems that there should be a better way but with all the different corporate entities producing tax forms, it would be a herculean task to create an app that could winnow the process to a “click here” action step. As I see it, in lieu of a technology solution in the near term, your best source of information is to work with a client’s financial planner. Let’s discuss the ways we can help.
Perhaps the most common form of proactive communication is the prior-to-year-end call or virtual meeting with the client’s CPA. We can share known facts around transactions that generated taxable gains or losses, as well as investment income and capital gains pass-through amounts generated in December by mutual funds. We can inform on other sources of income that began during the year, like Social Security or Required Minimum Distributions (RMD). Qualified Charitable Distributions (QCD) from IRAs to satisfy RMDs reduce the amount of recognized income on the Form 1040, but since the investment custodian’s 1099-R checks the box, “Taxable Amount not Determined,” we can fill in some of the details around the distributed amounts.
Once the calendar year ends, all of this will become clear through the tax forms generated but if a tax preparer is trying to advise a client on whether to make an estimated tax payment before year-end, this estimated income could be helpful.
With the 3.8% Net Investment Income tax still lingering in the tax code, planning for Modified Adjusted Gross Income (MAGI) below the single or married thresholds of $200,000 or $250,000 will allow the client(s) to avoid some additional tax.
In certain circumstances, advisors are helping clients “soak up” the lower brackets to generate capital gains at the 0% rate, but unintended consequences can result in the form of making untaxed Social Security into taxable Social Security. Collaboration between the financial advisor and the CPA should be able to quickly determine if the extra tax on Social Security is worth the tax-free cap gains.
Often clients that are new to a financial advisor are asked to invest in new mutual funds, which can cause capital gains around repositioning. A cursory review of the tax return by the advisor may reveal charitable (cash) donations, which can be redirected through a gift of appreciated securities to a newly-formed Donor Advised Fund. A terrific way to separate the charitable tax deduction from the timing of charitable donations, donor advised funds allow for “bunching” of deductions in one year, which can be coupled with cap gains recognition on investment accounts in the same year. Many times the deduction is at a higher marginal tax rate than the cap gains rates, allowing for some beneficial “leverage” with the tax rate disparity.
While these tax strategies are not “novel” to the seasoned practitioner, they can make tax time go a little smoother and couple our clients’ objectives to their taxes in sensible ways. If you’d like to learn more about how to create positive collaboration with Foster Group (perhaps after April 15th), contact us.
Foster Group is not engaged in the practice of law or accounting.