Fiduciary Trust International


Six Planning Strategies to Minimize Your Tax Burden

March 2015

Developing a thoughtful, well-planned tax strategy can significantly reduce the bite taxes take out of your wealth. Here are a few tax planning approaches to consider.


  • Delay one-time income occurrences

If possible, postpone lump sum income such as bonuses or the sale of a business into a future tax year, especially near year-end. Many variables can change your tax bracket from year to year, including investment income, deductions, and the ability to offset gains. However, even if you are in the same bracket in a future year, the time value of money means a dollar saved in taxes today is worth more than a dollar saved in the future.

  • Fully utilize tax-advantaged savings opportunities

Today’s tax laws increase the benefits of making contributions to tax-deferred retirement accounts such as 401(k)s and IRAs. Contributions to these plans may reduce your adjusted gross income (AGI), potentially keeping you in a lower income tax bracket.

  • Consider an installment sale

Arranging the sale of high-value items, such as real estate, collectibles or other property, in an installment sale can help defer capital gains tax. The buyer takes possession of your property immediately while paying you over time in periodic installments, spreading gains over multiple tax years.


  • Harvest losses at year-end

We never recommend making portfolio decisions for tax reasons alone. However, if you are planning on selling a security, selling at a loss at year-end rather than waiting until the next year can help offset taxable gains and reduce your AGI.

  • Use capital loss carryovers against current year capital gains

If you have carryover losses from a prior year (the amount of capital losses that exceeded your capital gains in past years over the $3,000 annual limit), be sure to use them to further offset any gains in the current year.

  • Amortize taxable bond premiums

If you hold taxable bonds that you purchased at a premium, consider amortizing the premium on the bonds. Rather than taking a capital loss at disposal, you can amortize the premium over the life of the bond and use it to reduce the tax liability on the income you receive from the bond each year. Since interest income can be taxed at a much higher rate than capital gains, the tax benefit could be greater.

For example, if you pay $11,000 for a 10-year bond with a $10,000 face value and a 5% yield, you would have a $1,000 capital loss at maturity. However, if you elect to amortize the $1,000 premium over the 10-year life of the bond (approximately $100 per year), you can use the amortization amount to reduce the taxable income of the bond each year. Instead of owing income tax on all $500 of annual interest income, only $400 would be subject to tax ($500 interest received less $100 amortization). You would not have a capital loss when the bond matures, but since the maximum capital gains tax is just 23.8% compared to income tax rates as high as 43.4%, that capital loss would not be as valuable.

  • Allocate assets tax-effectively and minimize portfolio turnover

From an asset allocation perspective, use investments that generate taxable income such as corporate bonds in your tax-advantaged accounts such as 401(k)s and IRAs. The dividend and interest income will not be treated as taxable income when received. Conversely, allocate investments that generate tax-free income, such as municipal bonds, to your taxable accounts where it will not affect your current income from a tax perspective.

In addition, excessive portfolio turnover can cause realized gains, triggering a tax bite and possibly moving you into a higher tax bracket. If it makes sense from an investment perspective, limiting turnover and controlling when gains are realized can be helpful in reducing the tax impact generated by these sales.


  • Make charitable gifts before year-end

If you are  making charitable gifts, plan to make your gifts before the end of the current year rather than the beginning of the next year to maximize current-year tax benefits.

  • Pay estimated state and local income taxes in the current tax year

If you pay estimated state taxes quarterly, you can pay your final installment in the current year, and deduct that amount in that year. You may also pay an additional amount, up to your total expected liability in the current year if you’d like to deduct that amount in that year as well. However, if you are subject to the Alternative Minimum Tax (AMT), you should consider delaying payment until the following year. 

  • Shift medical expenses into years where you will have a lower AGI

Since medical expenses can only be deducted if they exceed 10% of your AGI (7.5% for taxpayers 65 or older at year-end), it may make sense to shift deductions between years. If possible, incur medical expenses in the year in which you will have the lower AGI because the lower your AGI, the greater your potential allowable deduction.

Pre-pay mortgage interest

Mortgage payments can generally be made in December on a loan payment that is due early in the next year to increase your current year’s deductions.


  • Gift property rather than cash

Consider using appreciated property instead of cash when planning for your charitable gift giving. Instead of potentially realizing capital gains on the sale of property to raise cash for charitable contributions, gift the appreciated property instead. This enables you to give a gift to a charity and not recognize a gain, while potentially fully recognizing a deduction for the fair market value of the property.


  • Run projections to determine the most advantageous filing status

Same-sex married couples must now file tax returns as married filing jointly or married filing separately. In most cases filing jointly will be the most tax-advantaged; however, couples should run projections both ways to determine the best outcome for their own situations.

  • Consider amending prior year returns

Couples should also look to see if amending prior year returns may benefit them.


The allowable 2016 federal estate tax exemption is set at $5.45 million for individuals ($10.90 million for married couples). Even if you believe your estate value will fall under this threshold, with a 40% maximum federal estate tax on any property transferred above this tax-free exclusion amount, the following strategies may prove to be valuable in maximizing the tax effective transfer of wealth.

  • Use your annual exclusion

You are allowed to gift $14,000 per year free of gift tax to as many individuals as you would like. Taking advantage of this annual exemption can help reduce your gift and estate tax burden if you believe your estate will exceed the maximum $5.45 million federal exemption amount for tax-free transfers.

  • Consider making additional gifts using any additional lifetime unified credit

Think about gifting above your $14,000 annual exclusion and use your available lifetime unified credit to transfer assets without incurring gift tax.

  • Gift low basis assets to beneficiaries who are in low tax brackets

If you have a donee in the 10% or 15% federal income tax bracket (taxable income up to $37,650 for a single taxpayer in 2016), it may make sense to gift appreciated assets to that individual because he or she will not be subject to capital gains taxes when the securities are sold. Otherwise, try to gift cash or non-appreciated assets to fully utilize your gift tax exemptions.

  • Plan for state estate taxes

With much attention being given to federal estate taxes, state estate taxes often fall under the radar. A number of states impose estate taxes separately from those imposed at the federal level and Connecticut imposes a state gift tax. Today, 19 states including New York, New Jersey, Connecticut, Maine and Rhode Island, plus the District of Columbia levy state estate taxes, and the rates can be as high as 20%.

More importantly, while the federal estate tax doesn’t kick in until an estate exceeds $5.45 million in 2016, states will often tax much smaller estates. For example, New Jersey exempts only up to $675,000. Any assets over the state exemption, even if that amount is less than the federal exemption, will be subject to state estate tax.

  • Pay for others’ medical and educational costs

This technique allows an individual to pay another person’s current medical or tuition expenses without incurring a gift tax as long as payments are made directly to the provider. This exclusion will not count against an individual’s lifetime federal gift tax exemption.

  • Have your surviving spouse leave your charitable legacy

Rather than giving assets to a charity through your will, consider leaving the assets to your surviving spouse with the request that he or she gift them to the charity. This way, your spouse will receive an income tax deduction for making the gift, and there is no estate tax on the bequest because it qualifies for the marital deduction. Your spouse is under no obligation to make the gift; however, if he or she complies with your wishes, this strategy could result in a more tax-effective transfer of wealth.


As always, it is important to speak with a professional to understand your options and how these strategies may benefit your own circumstances.



This communication is intended to provide general information. The information and opinions stated herein are as of November 2015, unless otherwise indicated, and do not represent a complete analysis of every material fact. We undertake no obligation to update this information. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual tax or investment advice or as a recommendation of any particular security, strategy or investment project. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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Six Planning Strategies to Minimize Your Tax Burden

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