Year End Planning

As we approach the end of the year, it is a great time to review your wealth goals and objectives and ensure that your current wealth planning strategies remain optimal.

For those considering tax moves, you generally have to take action before 1 January.  With various upcoming deadlines, now is the time to take advantage of tax-deferred growth opportunities, tax advantaged investments and charitable-giving opportunities among others. You may also want to maximize deductions and credits ahead of tax season. Reviewing your investment portfolio with respect to your goals and the current tax, political and economic landscape can help you and your adviser understand where adjustments need to be made for you to be optimally positioned for 2016 and beyond.

Below we outline a few planning areas to consider before 2016 ends. Keep in mind that the ideas listed are conversation starters for most investors. You and your adviser should assess any action based on your own personal circumstances.

Key 2016 US Federal Tax Rates and Limits

  •  Standard Deduction:


 Filing Status Amount
 Single $6,300
 Married Filing Joint / Qualifying Widow(er) $12,600
 Married Filing Separate $6,300
 Head of Household $9,300


  •  Itemized Deductions are reduced by 3% of Adjusted Gross Income (AGI) in excess of the following thresholds. A taxpayer may not lose more than 80% of his or her deductions as a result of the reduction in Itemized Deductions:


 Filing Status Income Level
 Single $259,400
 Married Filing Joint $311,300
 Married Filing Separate $155,650
 Head of Household $285,350


  • Personal Exemption is $4,050 with phase-out beginning at the same AGI thresholds outlined for Itemized Deductions.
  • Income tax bracket of 39.6% is applicable at the following thresholds:


 Filing Status Income Level
 Single $415,050
 Married Filing Joint / Qualifying Widow(er) $466,950
 Married Filing Separate $233,475
 Head of Household $441,000


  • Long-term capital gains and qualified dividends tax is 15%. This rate increases to 20% when the taxpayer is in the 39.6% tax bracket. A 0% rate applies to taxpayers subject to the 15% tax bracket or less.
  • Net Investment Income Tax (NIIT) charge of 3.8% and Additional Medicare Tax of 0.9% on wages applies at the following thresholds:


 Filing Status Income Level
 Single / Head of Household $200,000
 Married Filing Joint / Qualifying Widow(er) $250,000
 Married Filing Separate $125,000


  •  Gift and Estate tax limits:


US lifetime exclusion $5,450,000
Annual exclusion from total amount of taxable gifts $14,000
Annual exclusion for gifts to non-US citizen spouses $148,000

Income Tax Planning and Charitable Giving

  1. Give consideration to accelerating or deferring your income between this tax year or next (e.g., a bonus severance or retirement payments).
  2. Give consideration to any benefit achieved from accelerating or deferring any deductible expenses between this tax year and next (e.g. repair expenses associated with a rental property or payment of your 4th quarter state estimated tax payment before or after 31 December).
  3. Determine if you will be subject to higher 20% capital gains and dividend taxes. This is applicable for those individuals in the 39.6% income tax bracket.
  4. Determine if you will be subject to the Net Investment Income Tax (NIIT) charge of 3.8%. These thresholds are not indexed for inflation so more individuals are likely to come into this tax net each year.
  5. Work with your wealth adviser and tax specialist to determine when you should realize long-term gains and harvest capital losses. Offset investment gains with losses, as appropriate, to reduce your overall tax liability, including the Medicare surtax.
  6. Trustees of irrevocable trusts may want to consider distributing all or most trust income to beneficiaries. Income retained in the trust is often subject to higher tax rates and is also subject to the 3.8% surtax at a lower income threshold (only $12,400 for 2016) compared to individual thresholds. It is important to note, however, that decisions should be made within the boundaries of the trust’s governing instrument and state law.
  7. Be aware of “wash-sale” rules that stop you from deducting capital losses on the sale of a particular security if you purchase a similar position within a 61-day period (30 days before and after the sale date). The rules apply across portfolios, in both taxable and non-taxable accounts. So you cannot liquidate a position in your taxable account and establish a similar position in your IRA, for example.
  8. Give, but do so with an eye toward reducing your tax liability. Consider whether a trust or a donor-advised fund helps you meet your legacy and tax-savings objectives.
  9. Think strategically about your charitable contributions. For example, whether to donate low-cost basis stocks or highly appreciated assets rather than cash.

Key Dates to Remember

  • 12/30/2016 – Last day to sell a security to realize a gain or loss.
  • 12/30/2016 – Last day to establish a qualified retirement plan for 2016. SEP IRA plans may be established and funded until the tax-filing deadline (generally April 15) plus extension.
  • 12/30/2016 – Last day to complete a Required Minimum Distribution (RMD) for 2016.
  • 12/31/2016 – Last day to complete charitable contributions for 2016 (Be sure you allow enough time to complete donations that may require additional lead time).
  • 01/17/2017 – Fourth quarter estimated payment for tax year 2016 due.
  • 02/01/2017 – Deadline for employers to send W-2s/1099s to individuals.
  • 02/15/2017 – Deadline for financial institutions to send 1099s to individuals (reclassification of income can result in an amended 1099 being sent 30 days after).
  • 04/18/2017 – Deadline to file individual income tax return or file for a 6 month extension with IRS. Individuals outside the US on the date of filing generally have two extra months to file their individual income tax returns with the IRS.
  • 04/18/2017 – Deadline to file trust income tax returns or file for a 5 month extension with the IRS.
  • 04/18/2017 – NEW! Deadline to file Foreign Bank Account Report (FinCEN Form 114) for year 2016 with US Treasury. US citizens and residents abroad will receive an automatic two month filing extension to 15 June. Additionally, for the first time, an FBAR filing extension will also be available to 15 October although a further extension to 15 December is not available.
  • 04/18/2017 – Last day to contribute to Traditional IRAs, Roth IRAs, and Health Savings Account (HSA) for 2015. If you make a 2016 contribution between 1 January and 18 April 2017 make sure you notify the financial institution which tax year the contribution is for.

IRAs, 401(k) Plans and Other Retirement Planning Considerations

  1. Maximize your retirement contributions to take advantage of tax-deferred growth if you’re still working. Many companies allow you to arrange automatic contributions each pay period.2016 maximum contributions are as follows:
  • $5,500 to Traditional and Roth IRAs (an additional catch up contribution of $1,000 is available for those aged 50 or older) – allowable and deductible contribution limits are determined based on filing status and income limitations.
  • $18,000 to 401(k) plans (an additional catch-up contribution of $6,000 is available for those aged 50 or older). The total of all contributions to a 401(k) plan cannot exceed $53,000 (or $59,000 if aged 50 or older) in 2016. An employee may be able to make up to $35,000 in after-tax contributions before 31 December (in addition to the $18,000 in pre-tax contributions).
  • From April 2016, the maximum UK pension contribution allowance is tapered down from £40,000 to £10,000 for any individual who is an additional rate taxpayer. Individuals affected should consider maximizing their 2016/17 contributions and utilising any available prior year catch-up contributions. This may also be a way of using available excess foreign tax credits carried on your US tax return.
  1. Determine if you need to take required minimum distributions from your retirement accounts or annuity distributions. In most circumstances, Required Minimum Distributions (RMDs) for 2016 must be taken before the end of the year in order to avoid penalties. Individuals have the option to direct up to $100,000 in RMDs as a charitable contribution for the year.
  2. Consider whether a complete or partial conversion of legacy IRA or 401(k) plans to a Roth IRA makes sense. For the majority of taxpayers this will result in long-term tax benefits as (in most cases) subsequent withdrawals are not subject to tax. Although the conversions are taxable in the US (not in the UK) at ordinary tax rates, those who may have lower income subject to tax this year or have legacy 401(k)s with pre-tax and after-tax pots of money could consider converting them now. It is also now possible to move after-tax pots of money directly to a Roth IRA with the remainder going to a Traditional IRA. There are situations where a conversion may be tax-free or where one might be able to mop up the tax due on the conversion against foreign tax credits but it is best to speak to your tax accountant to get advice in this regard. If of course you expect to be in a substantially lower tax bracket in retirement then perhaps it may not make sense to convert today.

Estate and Gift Planning

  1. Review and update estate plans and objectives in light of any personal changes and changes set to take effect for UK non-domicile individuals in April 2017. Any needed wealth restructuring should take place well in advance of the new rule taking effect to allow for maximum flexibility.
  2. Capitalize on the 2016 gift tax exclusion to individuals and non-US citizen spouses. The lifetime exemption for US individuals was raised to $5.45 million in 2016. The higher limits allow you to transfer significant wealth without triggering a gift tax liability.
  3. Review the titling on all your accounts and property, as well as the beneficiary designations to ensure they reflect your current wishes and family dynamics.
  4. Establish and fund IRAs for the next generation. Consider making a gift of up to $5,500 to a Roth or Traditional IRA for any US resident children or grandchildren who are not funding their own IRAs but have enough earned income to do so. Contributions to IRAs for family members will be considered taxable gifts and should be coordinated with any other gifts that you make.

Education Planning

  1. Explore your funding options, including 529s, UTMAs and Coverdell Education Savings Accounts if you haven’t established an education savings account. If you have, consider fully funding existing education saving accounts for your children or grandchildren. Starting early and saving often may be your best bet here. As there is some grey area with respect to the funding of 529 plans while you are a UK tax resident, it is best to speak with a US/UK tax accountant before making 529 plan contributions.
  2. If you have overfunded education savings, give consideration to whether you can change the beneficiary to another qualified person and determine when it may be appropriate to take nonqualified 529 plan and education savings account distributions.
  3. Pay tuition bill directly to University. If you choose to pay the tuition bill for your children’s university expenses directly, this can qualify as an exemption from the US gifting rules and will not reduce your lifetime allowance.

Advice for Business Owners

  1. Get organized by first making sure your accounting records are updated and accurate.
  2. If you work for yourself, consider contributing to an individual qualified retirement plan, such as an individual 401(k), SEP IRA or SIMPLE plan, if you qualify. This can allow you to make contributions as an employee and employer based on your earnings which may result in higher deferral options. Consider whether you are eligible for additional contributions to your retirement plan.
  3. Think about how you would like to expand or improve your business in the next 12 months. Whether it is an acquisition or new equipment, there will be financial implications and tax considerations involved.
  4. Think about how to manage income and any tax-deductible business expenses.

There are several key actions you can take before 2016 to ensure you have a clear picture of where you stand financially. A call with your professional advisers will help ensure you are on track to meet your goals and help to identify areas in need of adjustment so your plan can evolve as your needs change.

Take the time now to discuss those changing needs, so we both fully understand where you are and where you want to go.

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