Tax Planning Should be Done Before Year End
We know you have a million and one things to do at the end of the year. However, some of those things can pay off more than others- possibly your tax planning. Don’t miss some of these opportunities. Keep in mind, please, that all of these items are just things to consider- please do not act on any of them without the professional advice of your tax advisor.
First, as you may remember, the recent tax law changes have increased the standard deduction for both married and unmarried filers. If you don’t know if you typically itemize, check your returns from last year and talk to your CPA. This is important to know when it comes to planning for 2019 and beyond, as it will determine which of the strategies you may be able to use.
If you own a business, or have had an investment loss this year, that is important to know as well. You may be able to use that loss to offset a gain that you have had this year in another investment that you otherwise may not have been able to take. A loss on an investment or through your business may also make it a good idea to look at doing an IRA Conversion.
An IRA Conversion is when you transfer money from a pre-tax account (IRA) to a Roth IRA. Upon the conversion, you must pay income taxes on all of the money that is converted for that year. Theoretically, the money that is now in the Roth IRA can grow tax free at the federal level and is also no longer subject to a required minimum distribution at 70 ½. This can be a very complex strategy and should NOT be done without tax guidance from your tax advisor. It can be an attractive strategy for people who have a dip in income, for those who have a very long time horizon before touching the IRA, when the markets are low, or for those who may never outlive their assets and want to think about reducing tax on inheritances long term. It’s often not a good strategy for those who do not have the liquidity to pay the tax separately.
If you are over 70 ½ and have not taken your Required Minimum Distribution from your IRAs and Retirement Plans yet, this also should be done, with guidance from your tax advisor, before year end. If it is not done, it creates a substantial penalty on top of the income tax you owe. If you haven’t yet taken yours, you can possibly donate it directly to a qualified charity up to $100,000. However, again, talk to your tax advisor- this has stipulations that must be followed.
If you are itemizing, charitable gifts should also be made before year end if you want to be able to possibly deduct them for 2019. For larger gifts, giving shares of appreciated stock (or the above mentioned RMD is also possible in some cases), may make more sense from a tax planning standpoint than to write a check. Because the standard deduction is higher than it used to be, it may make sense to plan your gifts in “chunks” (commonly referred to as bunching). This strategy entails giving a larger gift that is over the standard deduction every few years and none in between. You get a deduction the years you make the gift, and can talk to the charity about budgeting for the “off years”. Did we mention this is another one to discuss with your tax advisor?
If you are saving in a 529 plan for your child or grandchild and you want to receive the state tax deduction (if applicable) for that contribution, it also must be done before December 31st. Each state has different deductions amounts and rules. 529 plans also allow withdrawals for private K to 12 education up to $10,000 per year now. Your tax advisor can give you more details as they pertain to you.
Before year end, if you are participating in a 401k or 403b plan through work, be sure that if your plan was to maximize your contributions, you have done so. If you have not, you may be able to adjust your withholding before year end to get those last few dollars into the plan. Remember- those contributions add up!
Other benefit for those still working that is critical to review before year end is making sure you have withdrawn all of your contributions from your Flexible Spending Accounts for both childcare and health care. You want to choose the benefits for those plans before next year as well based on your anticipated needs.
Finally, for clients with varied income each year- those who are working or those who are living off investments, it’s a good idea to know approximately what this income looks like for next year before the year is over. A different income level or different sources of income than the past may present new opportunities or challenges to plan for. You still have time to possibly make a difference before year end. After December 31st, those opportunities are gone with Father Time.