The financial headlines in recent weeks have been dominated by efforts in Washington to pass a major tax reform bill. But the uncertainty created by the possibility of tax reform need not keep you from implementing year-end tax and other financial strategies that could save you money.
Here are six year-end planning moves to consider making between now and December 31.
1. Implement Income-Shifting Strategies
One way to reduce current income taxes is to defer taxable income into next year while accelerating deductible expenses into this year. Doing so will lower your current income, which could lower your tax bill in April. This strategy could be especially relevant this year due to the possibility of lower future tax rates if tax reform becomes law.
To defer income, you could request that any year-end bonuses be paid in early January instead of late December. And if you’re self-employed, you could hold off on sending December invoices until early January if your cash flow permits.
To accelerate deductions, consider prepaying 2018 property taxes that will be due early next year. Making contributions to your IRA or 401k is another possible strategy. The IRS gives flexibility to contribute with a deadline of the date you file taxes (April 15, for most people). Keep in mind the traditional IRA contribution limit for 2017 is $5,500 (or $6,500 if you’re 50 years of age or over) while the 401k contribution limit for 2017 is $18,000 (or $24,000 if you’re 50 years of age or over). There are also limitations to deductibility based on your income.
If you’re planning to fund a child’s college education, contributions to a 529 in some states offer a deduction on your state income taxes. These contributions need to deposited by year end.
2. Take Advantage of Tax-Loss Harvesting
There may be a silver lining to owning underperforming investment assets. With a strategy referred to as tax-loss harvesting, you can sell these investments before the end of the year to realize losses that can be used to offset up to $3,000 (when married filing jointly; $1,500 is the limit when filing single) in taxable investment gains and ordinary income. Unused investment losses above $3,000 may be carried forward to offset future capital gains or income, known as “Carry Forward Losses.”
If you implement this strategy, watch out for what’s referred to as the wash-sale rule. This prohibits you from buying back the security you sold — or any security that’s substantially equal to it — within 30 days.
3. Make Tax-Deductible Charitable Contributions
At this time of the year, many people desire to help others who are less fortunate. By donating cash or assets to qualified charitable organizations — also known as 501(c)(3) organizations — you may also be able to reduce your taxes.
Assuming you itemize deductions on your federal income tax return, you can deduct qualifying charitable contributions in the year in which they are made. This includes contributions of cash, investment securities and personal property such as furniture, clothing and vehicles. You can generally deduct up to 50% of your adjusted gross income (AGI) as charitable contributions each year if giving cash, while the deduction is usually capped at 30% when gifting investments.
If you own appreciated securities, consider gifting them to a qualified charity. Neither you nor the charity will have to pay capital gains tax on the appreciated value. For example, suppose you own a stock that’s currently worth $20,000 and you paid $10,000 for it five years ago. If you donate the stock instead of selling it, you can deduct the full $20,000 value while avoiding paying taxes on $10,000 in capital gains.
If your income is substantially higher in 2017, then you may want to consider maximizing your charitable deductions for a couple years to come through charitable gift funds. This allows for deductions at a higher bracket.
4. Take Required Minimum Distributions (RMDs)
If you own a traditional IRA, SIMPLE IRA, SEP-IRA or 401k account, you can’t keep your money in the account indefinitely. You must begin taking RMDs from these types of accounts when you turn age 70½. (Note that RMDs do not apply to Roth IRAs because this money has already been taxed.) RMDs will be counted as taxable income during the year they’re taken.
For IRAs, the first RMD must be taken by April 1 of the year following the calendar year when you turn 70½. For 401ks, the first RMD must be taken by April 1 following the latter of the calendar year when you turn 70½ or retire. After the first year, you must then take RMDs by December 31 each year.
Have an Inherited IRA? Many people forget that these are also subject to RMDs even if you’re under the age of 70 ½.
5. Rebalance Your Investment Portfolio
Thus far, 2017 has been a strong year for the stock market. One result of this could be that your target asset allocation has been knocked out of whack. For example, gains in your stock portfolio could push your percentage of equity holdings higher than your desired balance.
Therefore, consider meeting with your investment advisor to analyze the current status of your asset allocation. Based on this analysis, you may need to sell securities in some asset classes and buy securities in other asset classes to bring your allocation back to your target balance.
6. Spend Down Expiring Benefits
Taking advantage of tax –advantaged Flexible Savings Accounts (FSAs) can be a good move to use pre-tax dollars for specific known expenses. One challenge with these accounts is that the funds in them usually expire at the turn of the year. If you have unused funds, you should generally try to use it before losing it!
In some cases, employers give an elective to extend the benefits until March 15. Before blindly purchasing items, check with your HR team about the extension
The end of the year is approaching quickly, so make plans now to determine whether strategies like these could be beneficial for you. And be sure to consult with a tax advisor for more details on the particulars of these and other year-end tax and financial planning strategies.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.
Andrew Wagner, CFP®
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