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Be Prepared: Year-End Planning Tips

Author

Stephen Aucamp

Date

November 2018

The end of the year is approaching, and it is a good time to strategize on ways to reduce your tax bill or otherwise improve your financial situation. Given that there were significant changes to the tax laws via the Tax Cuts and Jobs Act earlier this year, including lower income tax rates, an increased standard deduction, and reduced itemized deductions, it may be necessary to consider different year-end moves this year.

Below are some of the more common actions to review in the next few weeks.

A portfolio review. Global markets have diverged significantly this year, with the U.S. outperforming international markets by a wide margin. Year-end is a good time to rebalance your portfolio to maintain the appropriate asset allocation for your desired level of risk.

Tax-loss harvesting. On a related note, you may consider selling any funds held at a loss and investing in a similar ETF for 30 days, then reinvesting in the fund at the end of that period to harvest the losses. This will allow you to offset gains (including potential capital gain distributions discussed below) generated elsewhere in the portfolio or carry over the losses to future years. Note, however, that special rules apply to private foundations. Foundations are subject to a tax on net investment income, and there is no benefit to harvesting losses in excess of gains, as losses cannot be carried forward. Thus, consider recognizing gains to the extent there are realized losses in a private foundation.

Income deferral. If you have flexibility in the timing of income, you may want to defer income to 2019. Of course, if your marginal tax rate will be significantly higher in 2019, you may want to accelerate income into 2018. Remember to pay close attention to the surtaxes, including the 3.8% surtax on certain types of unearned income and the 0.9% Medicare surtax on wages in excess of $250,000 (for married couples).

Capital gain distributions. Many mutual funds have capital gain distributions in December due to realization of gains from prior years. You should check with your mutual fund families to determine the extent of any capital gain distributions, and you might consider selling the fund before the distribution date, then investing in an ETF temporarily and buying the fund back after the new year. (This, of course, refers to funds held in taxable accounts.) But taxes alone should not drive investment decisions, and you should consult with your advisor before making such decisions.

Maximize retirement savings. Review your contributions to tax-deferred accounts such as 401(k)s and IRAs. If you haven’t contributed the maximum amount, consider doing so prior to year-end, especially any amount that would be matched by an employer. If you are self-employed, consider contributions to a SEP-IRA or SIMPLE IRA.

Consider Roth-IRA conversion. Given the poor performance of most international equities this year, it may make sense to convert IRA assets invested internationally into a Roth IRA. Remember that such a conversion will increase adjusted gross income (“AGI”) for 2018, which may affect tax breaks based on AGI or modified AGI.

Monitor timing of expenses that may qualify as itemized deductions. The standard deduction has increased to $24,000 for joint filers. That, combined with the reduction in many itemized deductions (limit of $10,000 for state and local income taxes, mortgage interest limited to $750,000 mortgage, non-deductibility of miscellaneous itemized deductions, e.g., investment management fees and tax preparation fees) may cause you to consider bunching expenses in the year where they will provide more of a tax benefit. For example, you might want to pull medical expenses and charitable contributions into this year if you are more likely to be able to itemize deductions in 2018 versus 2019.

Annual gifts. In 2018 you can make a tax-free gift of up to $15,000 to as many people as you desire. If you are married, you and your spouse can collectively give $30,000. This is a powerful tool for reducing the value of your taxable estate and will likely benefit your descendants as well. If you haven’t made these annual gifts yet, consider making them prior to year-end.

Charitable contributions. If you are charitably inclined, consider making donations before year-end. If you expect to be in a significantly higher tax bracket next year, you may want to postpone the donation until January. Either way, now is a good time to evaluate your charitable gifts. Gifting appreciated securities rather than cash can also help to reduce your tax burden while still achieving your charitable goals.

  • Gifting of Qualified Plan Assets — Consider making charitable donations from your IRA directly to charity. These distributions will not be included in your gross income but will count as part of your required minimum distribution. This strategy works particularly well if you can’t otherwise itemize deductions.

Required Minimum Distributions. Remember to take any required minimum distribution from an IRA or 401(k) plan. If you plan to make charitable contributions, consider gifting directly from your deferred account as discussed above.

Health Savings Accounts. To the extent possible, maximize your contributions to an HSA account. The contribution limit in 2018 is $6,900 for a family. Remember that these funds can be invested and rolled over into future years, so these accounts can be a terrific source of funding for medical expenses in retirement.

Wealth management goes beyond portfolio management, and as a result there are many factors to consider before year-end. While not all of the tips noted here may be appropriate for you as an investor, now is a good time to reach out to your advisor and begin planning.

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