News & Resource Center

Tax Impact Newsletter

Tax Tips

Year-end planning for mutual funds

If you’ve sold mutual fund shares at a gain during the year, there are some year-end moves you can make to soften the tax blow. One strategy is to “harvest” capital losses (by selling investments that have declined in value) and using those losses to offset the gain. You can even buy back the investments after deducting the loss, so long as you wait at least 31 days.

Another strategy is to ensure that mutual fund shares with the highest cost basis are sold first, minimizing your gains. To do this, use the “specific identification” method for calculating basis and inform your broker which shares you wish to sell. Absent such instructions, the first-in, first-out method will be applied by default, which may increase your capital gains.

Beware deduction limits

A basic precept of year-end tax planning is to defer income to next year and accelerate deductions into the current year. But as you consider your options, keep in mind that deduction limitations for high-income taxpayers may reduce the effectiveness of this strategy.

The limits apply to deductions for taxes paid, interest paid, charitable gifts, job expenses and certain miscellaneous deductions. They don’t apply to medical expenses, investment interest expense, or casualty, theft and gambling losses.

Tax-free capital gains?

For taxpayers in the middle and upper ordinary-income tax brackets, long-term capital gains are taxed at rates ranging from 15% to 23.8% (including the 3.8% tax on net investment income). Taxpayers in the 10% and 15% ordinary-income brackets, however, enjoy a 0% tax rate on long-term capital gains. One way to take advantage of tax-free capital gains is to transfer stock or other investments to family members in the two lowest tax brackets — for instance, single filers with taxable income of $37,950 or less in 2017 ($75,900 for married couples filing jointly).

A few caveats:

  • Consider potential gift tax consequences before transferring assets.
  • Watch out for the “kiddie tax.” Generally, if you transfer capital assets to a dependent child under the age of 19 (24 for a full-time student), any unearned income (including capital gains) in excess of $2,100 will be taxed at the parents’ rate.
  • The 0% rate applies only to the extent that capital gains increase the recipient’s taxable income to the top of the 15% bracket. Additional long-term capital gains are taxed at 15% until the highest bracket is reached; then they’re taxed at 20%.

© 2017



Calendar tax year or fiscal tax year?
Many businesses use the calendar year for tax-filing purposes, but in some cases a fiscal year — such as October 1 to September 30 — may be advantageous. For example, if most companies in your industry use a fiscal year, adopting a matching year makes it easier to benchmark your performance against that of your competitors.

Seasonal businesses also stand to benefit. A farming business, for example, might incur most of its expenses in the fall and reap most of its income the following spring. A fiscal year that encompasses both periods produces more accurate matching of income and expenses.

For existing businesses, switching to a fiscal year requires IRS permission. Keep in mind that fiscal year reporting is unavailable to some businesses, including sole proprietorships and certain pass-through entities. If you adopt a fiscal tax year, you must use the same year for financial reporting purposes.

Giving to charity? Consider a donor-advised fund
If charitable giving is an important part of your financial and estate plans, a donor-advised fund (DAF) is one of the most tax-efficient vehicles available. Similar in many respects to a private foundation (but at a fraction of the cost), a DAF allows you to take an immediate charitable income tax deduction for your contributions, while retaining the flexibility to identify the charitable recipients down the road. However, keep in mind that, unlike a foundation, a DAF doesn’t give you the final word on how your charitable dollars will be spent. But in most cases, the fund sponsor will follow your recommendations.

Tax break for solar panels
Thinking about installing solar panels in your home to generate electricity or hot water? Not only can such an investment make your home more energy-efficient, but it can also generate significant tax benefits. Qualified solar property is eligible for a 30% tax credit. The credit is nonrefundable, which means it can’t exceed your tax liability for the year. But you can carry forward the excess to the following year. A similar credit is available for businesses (so long as the solar equipment isn’t used to heat a swimming pool).

What if you own residential rental properties? Can you claim a tax credit for installing solar panels in your rental units? There’s a common misconception that you cannot. That’s because Section 25D of the tax code, which authorizes the residential energy credit, states that it’s unavailable for investment property (such as rental property) that’s not also used as your residence. However, Sec. 48 provides a tax break for solar panels as part of the general business credit, which can be used by rental property owners if certain requirements are met.



AJC TWP 2022 Award Ribbon
AJC TWP 2022 Award Ribbon

Contact Us

Contact Form Footer

  • This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
  • This field is for validation purposes and should be left unchanged.