Want to feel on top of things and in control of your money? Then take the time to get your finances in order BEFORE the year comes to a close. Taking these steps by year-end gives you enough time to save on 2018 taxes and set up your investments for success in 2019 – without putting a damper on your holiday cheer.
There are many ways to improve your financial life throughout the year, such as:
· Automating bill pay
· Rebidding car insurance
· Checking credit reports
· Updating beneficiaries
But Dec. 31 only comes once a year, and the IRS in many situations, gives us only until that date to get our taxes in order.
Granted, the new tax law will have a positive impact on many households this year. Wall Street Journal writer Laura Saunders reported on Nov. 2 that an estimated 65% of Americans will see their taxes reduced and 6% will see an increase.
In addition, tax filing will get simpler for many. Only 18 million people will need to itemize compared to 47 million in 2017 (per the Joint Committee on Taxation). Also, the number owing the alternative minimum tax (AMT) will go down by over 95%.
Whether you are working, approaching retirement, or already retired, here are 10 core financial housekeeping areas to address to make sure you’re set up for financial success.*
1. Reduce Taxes on Investment Gains. Tax-loss harvesting can help offset capital gains with losses from stocks, bonds, mutual funds, and exchange-traded funds (ETFs) if you invest in a taxable brokerage account. The idea is simple: Offset realized capital gains with realized capital losses. That means selling stocks, bonds, and funds that have lost value to help reduce taxes on sales of winning investments. Be aware of trading costs, and use caution to avoid the “wash sale rule,” which disallows losses if a similar investment is purchased within 30 days.
2. Review Estimated Payments. Households must still ensure they are making payments on a regular basis to the Feds and States. The Safe Harbor Rules require one to pay either 90% of current year tax liability or 110% of prior year tax liability. You still have time to increase your payments in order to avoid penalties. If you are coming up short, you can increase your federal tax deduction through payroll or your IRA required minimum distributions (RMDs) if over 70, which assumes taxes were spread throughout the year.
3. Revisit Any Highly Appreciated Concentrated Stock Positions Held. In other words, if you hold more than 10% of any one stock in your investment portfolio including significant gains, you might consider selling a portion before year-end. Then queue up an additional portion for January 2019. This not only reduces the risk in your portfolio but also spreads capital gains over time.
4. Give Gifts. At risk of paying federal or state estate taxes, take advantage of your annual gifting opportunity. The annual exclusion—the amount you can give to others without triggering a gift tax form that might lead to estate taxes—is $15,000 per spouse per recipient. In other words, a couple has an opportunity to give $30,000 to each adult child annually without triggering any estate tax concerns. If you are worried about facing state inheritance taxes or federal estate taxes, then gifting during life might serve you better. Consider giving appreciated stock which also may reduce your tax impact.
5. Boost Contributions. Still working? Maximize your contributions to tax-advantaged retirement savings accounts. Click to learn more about these valuable tax shelters here.
· 401(k)s - Contribute $18,500 if under 50, $24,500 if over
· Retirement savings accounts for entrepreneurs - Self-employed individuals must ensure an appropriate retirement account is open to fund in the spring. For example, Solo 401(k)s, one incredible tax shelter option allowing up to $55,000 in total sheltered income, needs to be opened by Dec. 31.
· Health Savings Accounts (HSAs) - $3,450 individual, $6,900 family, extra $1,000 if 55 or older
6. Take Your Distributions. Once you reach 70 ½, make sure to take your required minimum distributions (RMDs) on all traditional IRAs and 401(k)s. Your first RMD must be taken by April 1 of the year after you turn 70 ½. Subsequent RMDs must be taken by Dec. 31 of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount, the steepest IRS tax penalty. You need to calculate your RMD for each IRA separately, but you have the flexibility to take your total RMD amount from either a single IRA or a combination of IRAs. However, RMDs from Qualified Retirement Plans (like 401(k)s) or Inherited IRAs must be calculated separately, and can only be taken from their respective accounts. You do not need to take RMDs for Roth IRAs.
7. Manage Your Withdrawals. Already retired with IRAs, 401(k)s and taxable accounts? Manage withdrawals from taxable IRAs, 401(k)s and Roth IRAs to achieve your tax planning goals. How and when you withdraw money from retirement accounts can affect how long your money lasts. Typically, it makes sense to withdraw from taxable accounts in your early retirement years, and let the IRAs/401(k)s and Roths grow tax-deferred as long as possible. But there is a very strong case for taking some IRA withdrawals (including Roth conversions) in your 60s to level out your top tax bracket if you retired early and have a significant sum of money in your IRA/401(k) accounts. This is an especially prudent step to take with the new tax law that allows for lower tax brackets until 2025.
8. Maximize the Power of Charitable Giving. Rather than giving money every year, bunch up charitable contributions every other year to maximize deductions if itemizing. Consider Qualified Charitable Distributions (QCDs) as a giving strategy to fulfill Required Minimum Distribution (RMD) requirements if you are 70 ½ or older. If you are unsure of what charity to give to but would like to make the contribution now, consider donor-advised funds. These give you the tax break in 2018 and the flexibility to choose the charity at a later date.
9. Consider a Roth Conversion. Explore if it makes sense to convert all or a portion of your IRA to a Roth IRA. Doing so is a taxable event, meaning you may owe taxes on the amount covered. However, Roth IRAs are not subject to RMDs in retirement and have the ability to grow tax-free, which is a beneficial factor when considering tax planning.
10. Get a Second Opinion. To be sure you’re making the right decisions for your financial future, consult with a tax professional. Not only is it important to understand from your tax expert how the items above might affect you, it’s also wise to collaborate on how to optimize taxes on an annual basis.
By carefully applying these strategies to your tax situation, you can save hundreds, perhaps even thousands, of dollars come April. Being on top of your money will give you even more cause to celebrate this season!
*All tax suggestions should be reviewed with your tax professional as all tax situations are unique!
Wealthspring Financial Planners is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment or tax advice or an offer to buy or sell securities.