For many of your clients, 2014 has been a prosperous year and they have seen substantial gain across their portfolios. Developing your expertise in tax planning—and putting it to work to protect clients' wealth—should be a top priority. And while it should be a priority all year long, it becomes especially important at year-end. Deadlines are approaching, but it still is not too late to take measures that can help reduce the taxes they will owe on income and investment gains.

Taxes can be the single biggest investment expense a client will face, especially the high net worth. Taxes can be as much as 40% or even 50% of client’s earnings every single year, when Federal and State taxes are combined.

Based on changes to the tax code in 2013, many households are now paying more—and high earners have been hit hardest. Individuals with income over $406,751 and married couples with income over $457,601, face a 39.6% income tax bracket, as well as taxes of up to 23.8% on dividends and long-term capital gains. In addition, clients earning above $225,000 are subject to a 3.8% Health Care Surtax on investment income.

Likewise some states also increased tax rates in recent years. In November 2012, California passed Proposition 30, creating three new upper income tax brackets. The new top income tax rate, for individuals with annual income of more than $1 million, became 13.3%, up from 10.3%. That eclipses Hawaii’s top rate of 11% and Oregon’s top rate of 9.9%. In May 2013, Minnesota legislators passed H.F. No 677 Omnibus Tax Bill, increasing the top tax rate for individuals with annual income of more than $150,000 to 9.85%. Other states with the highest upper income tax brackets include Iowa (8.98%), New Jersey (8.97%), Vermont (8.95%), Washington D.C. (8.95%), and New York (8.83%).

Without taking the right proactive measures now, clients could pay more than expected to the IRS come April 2015.


An important first step in the tax planning process is to help clients diversify between different tax rates and different types of taxes, as well as diversify between taxable investments and tax-deferred vehicles, to help control not only how much your clients pay in taxes—but also when they pay taxes.

To achieve “tax diversification,” effectively manage the timing of taxes, and ultimately generate more wealth, advisors and clients alike recognize the power of tax deferral. In one of Jefferson National’s most recent surveys, 96% of financial advisors say tax deferral is important, and 94% report that their clients agree. With tax deferral, clients keep more of what they earn by deferring taxes during peak earning years, when they are taxed at a higher rate. They accumulate substantially more through tax-deferred compounded growth. And when they withdraw income in retirement years, they are likely to be in a lower bracket and pay less in taxes.

There are a number of solutions for using tax deferral to manage and mitigate clients' tax obligations:

Max-Out Qualified Plans: The first fundamental step in any tax-optimized strategy is investing in tax-deferred vehicles like a qualified plan. To impact a client’s 2014 taxes, contributions to a 401(k), 403(b), or similar workplace retirement plan must be made by December 31, 2014,—so there is still time to act. The 2014 contribution limit to employer-based 401(k) plans is $17,500 ($23,000 for people age 50 or older).

To make a 2014 tax-deductible contribution into an IRA, the deadline is April 15, 2015. The current contribution limit is up to $5,500 ($6,500 for clients age 50 or older). Many advisors prefer to wait until this April deadline to evaluate the client’s tax return and determine the best way to leverage an IRA. With a Traditional IRA, clients pay no taxes now—and instead wait to pay taxes later when making future withdrawals during retirement. With a Roth IRA they pay taxes now—but make future withdrawals tax-free and penalty-free as long as they are at least 59½.

Roth Conversions: A Roth IRA can be an important tax-free source of income for clients in later years. But when converting from a Traditional IRA to a Roth IRA, the entire value of the IRA is considered ordinary income. This “bracket creep” can create an immediate tax burden, a disadvantage for some clients considering a conversion. Many clients can save more on taxes by waiting until they are in retirement to do the conversion, when they will most likely be in a lower bracket. When converting to a Roth, clients have until October to undo the conversion and turn the Roth back into a Traditional IRA.

Asset Location for Tactical and Alternative Strategies: To manage the market’s ongoing volatility and generate more alpha, today many advisors use tactical management or non-correlated assets such as liquid alternatives. But these investments can be tax-inefficient due to high turnover and short term capital gains. Research shows that using asset location helps to increase the returns of tax-inefficient investments by 100 bps or more—without increasing risk—while mitigating any tax implications. For clients heavily allocated to fixed-income, commodities and REITS—typically taxed at higher ordinary income rates—asset location can have a measurable impact as well, preserving all of the upside without the drag of taxes. “Locate” these tax-inefficient investments in a tax-deferred vehicle for the high-net-worth who can quickly max out the low contribution limits of their qualified plans.

Maximizing contributions to tax-deferred investing vehicles and using asset location to optimize tactical management, alternative strategies and other tax-inefficient assets are fundamental elements to help plan and manage your clients’ taxes. Other year-end tax strategies that are relevant, especially to the high net worth, include the following:

Tax-Loss Harvesting

Taxpayers in higher brackets can harvest losses to offset investment gains and lower their tax liability. Focus on selling losing investments that no longer fit your client’s investing strategy, or use this as an opportunity to rebalance the portfolio. Don’t sell shares to lock in a loss with the intention of buying them back right away. The IRS “wash sale” rule bars investors from claiming the loss if they buy the same or a “substantially identical” investment within 30 days of the sale.

Annual Gift Tax Exemption

An individual client can give a gift of up to $14,000 per year—and couples can give a gift of up to $28,000 per year—to an unlimited number of recipients. These gifts can help reduce the amount of their taxable estate—and are exempt from the federal gift taxes. Gifts may include cash, stocks, bonds, and portions of real estate. To contribute money toward a child’s education, clients typically can make a payment directly to an educational institution and pay no gift tax. To fund education expenses clients may also consider a tax-deferred 529 plan.

Charitable Contributions

When making a significant gift to charity, clients should consider giving appreciated stocks or mutual fund shares that they have owned for more than one year. The deduction for the charitable contribution is the fair-market value of the securities on the date of the gift—not the amount the client originally paid for the asset. Clients can boost their tax returns by deducting the appreciated amount—while never paying any taxes on the profit. Keep in mind that if clients expect their income to increase next year, they may benefit by waiting to defer charitable contributions and other deductible expenses accordingly.

While the competition for high-net-worth clients continues to increase, and complex market dynamics make every basis point of performance count, you can differentiate your firm and create more value for your clients by demonstrating your expertise in tax planning. Taxes may be one of the biggest investment expenses that your clients face. By using simple effective tools, you can help clients achieve tax-diversification, optimize the performance of tax-inefficient assets, and mitigate the rising tax rates on income and capital gains. The sooner you begin tax planning, the sooner your clients can begin to reap the benefits.

Laurence Greenberg is President of Jefferson National, a developer of investment-only, variable annuities retirement products for financial advisors.

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