Tax Webinar Follow-up: Dean Mioli Answers Your Most Taxing Questions

Feb 16, 2017

taxIn last month’s tax strategies webinar, our own Dean Mioli walked us through the ideas and tools that can help advisors who are looking for differentiation in a commoditized investment world. More than 900 advisors registered to hear about strategies and ideas that may prove beneficial with the new administration now in place.

There were several questions we didn’t get to at the end of the webinar, so I asked Dean to help answer a few. Some questions were specific to possible tax law changes and implications – since we can’t predict the future, we will defer those to later in the year, when tax policy becomes clear.

Q: Will traditional IRA conversions to a Roth IRA still make sense in the event of lower brackets?

A: Yes absolutely! Tax rates are volatile. We seem to be entering a period of lower tax rates and should take advantage of them. History suggests that tax rates could find themselves going the other way in the future. So with the anticipation of lower federal tax rates, Roth conversions are the number one planning idea for 2017. But there is more! If by chance lower rates don’t happen in this year and a Roth Conversion was done for 2017, the taxpayer has an out. It is called a re-characterization which essentially reverses the Roth and can be done up to October 2018. It would be as if it never happened.

Getting “the tax man” out of the way at a favorable tax rate, which is essentially what the Roth conversion is doing, seems like a smart tax idea.

Q: Do you have some ideas on the best way to “harvest” capital gains of appreciated securities in brokerage accounts?

A: There are a few considerations when harvesting gains in a taxable brokerage account.

  • A married couple filing jointly is in the 15% tax bracket if their taxable income is $75,900 or less ($37,950 for single). Long-term gains harvested within the stated taxable income limits will have a tax rate of “zero.” Harvesting long-term gains in the 15% tax bracket can be a tax-smart strategy. If for some reason, their taxable income exceeds the 15% tax bracket upper limit, the long-term gains could find themselves partially taxable.
  • Other considerations?
    • Losses that can be harvested to offset the gains. If you are looking to harvest gains, are there losses that can be harvested as well to offset some or all the gains?
    • What about if the gains are large? The use of a Charitable Remainder Trust (CRT) can be terrifically useful to manage the tax recognition of the gains. Selling appreciated securities inside the CRT does not generate an immediate tax bill back to the trust grantor. The CRT goes a long way in managing tax volatility, while simultaneously creating a charitable deduction and tax favored cash flow from the trust for the trust beneficiaries.

I would add that our Investment Services Team (IST) has been helping advisors manage the cost of portfolio transitions; you should look to your platform provider or other resources than can help.

Q: Can you take an Inherited Spousal IRA, delay RMDs to the spouse’s age 70 ½, and then perform a spousal rollover?

A: A spouse has the ability to select an inherited IRA or do a spousal IRA rollover (make the IRA theirs). Normally, we would recommend that if the spouse is under 59 ½, start with the inherited IRA, just in case the living spouse will need money prior to 59 ½. After age 59 ½, the living spouse could then do a spousal rollover to his/her own IRA.

Q: Could you go over the Qualified Charitable Deduction (QCD) and when that strategy might be appropriate.

A: If a retired taxpayer was not in need of their Required Minimum Distribution (RMD) for cash flow but does contribute to charity, donating ones RMD can make good tax sense. Below are the requirements and potential benefits.

  • Donate Required Minimum Distribution (RMD) to charity
    • Must have attained age 70 ½
    • Up to $100,000
    • A Donor Advised Fund is not a qualifying charity
    • Make sure the tax preparer knows that the QCD was made
    • With an RMD that is a QCD, the taxpayer does not pick up the income but also does not get the charitable deduction
  • Keep in mind IRA Distributions are taxable:
    • Income taxes on Social Security benefits can increase
    • Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available)
    • AGI limitations trimming itemized deductions can apply
    • Medicare insurance premiums can increase

The above is an example of combining tax strategies, RMD planning and charitable giving to create a tax savings powerhouse considering the above could be done in future tax years.

What 2017 has in store?

Dean’s presentation kept coming back to the fact that tax planning is a year-round exercise. But he also suggested that “2017 has the potential of being the mother of tax law changes since 1986, and advisors will need an extra degree of sensitivity to tax matters.”

Start with a 2016 tax return review and talk to your clients about the potential impact of tax law changes. Have your action plan prepared; depending on how the law(s) change, you can pounce on the planning opportunities before year end.

Need help? Check out our Tax Management toolkit.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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