Financial Planning Department
Planning may be more important than ever this year, but the uncertain fate of the proposed tax changes in Congress could alter these recommendations. It is important to follow any new developments closely to see how this could affect your income in 2018 and beyond.
As we approach the end of another tax year, it is beneficial to consider certain actions that can not only result in a lower tax bill this year, but also in the years to come. Below are a number of strategies you may wish to utilize prior to December 31.
- Take advantage of preferential capital gains rates –For those individuals whose income falls in the 15% marginal bracket, long-term capital gains are taxed at 0%. With this in mind, you may wish to consider realizing enough gains to fill up the 15% bracket and therefore pay no capital gains taxes on that income. However, be careful as an increase in Adjusted Gross Income (AGI) can affect taxability of Social Security, itemized deductions subject to thresholds, charitable deductions, credits, etc.
- Harvest losses –If you anticipate having large capital gains this year, they can be offset by selling other positions at a loss. This can be especially beneficial in situations where the gains will be subject to the higher rate (20%) and/or the 3.8% Medicare Surtax. In addition to mitigating capital gain income, you can also offset up to $3,000 in ordinary income and carry the remaining balance forward for future tax years. Finally, reducing net gains will also reduce AGI which can have a positive effect on certain deductions. An important reminder when utilizing this strategy is to avoid the wash sale rules this means that if you sell an investment at a loss, you must wait 30 days (both before and after the sale) to purchase that same investment.
- Convert your Traditional IRA –If you think you might be entering a higher tax bracket in the future, will be in a lower than normal bracket this year, or think tax rates will rise, it might make sense to convert your Traditional IRA to a Roth IRA. This will allow tax-free growth of your money and future qualified distributions will be tax-free (assuming you meet the necessary qualifications). This strategy can also be beneficial in situations where your account has lost money but will likely recover; a conversion will result in fewer taxes payable than otherwise would be due to the diminished balance. Consider pairing this strategy with a charitable donation (below) to at least partially offset taxes due on the conversion. Remember under current law you have until the tax deadline of the following year to re-characterize the conversion if your situation changes or you find yourself unable to pay the tax, but this option could disappear if the proposed tax reform bill becomes law.
- Donate to charity –For those who itemize deductions (or plan to) and are charitably inclined, donating cash or property to a qualified organization can have a sizable impact on your tax bill. In general, contributions to charity can be deducted by up to 50% of AGI, but a 30% limitation may apply to certain organizations. In addition, the IRS allows tax-free Qualified Charitable Distributions (QCDs) directly from your IRA to a charity of your choice in lieu of taking a traditional RMD. To utilize QCDs, taxpayers must be over 70.5 years old and up to $100,000 can be transferred. Please note that the charitable deduction is another area that could change with tax reform. Proposed legislation could make it harder in the future for many individuals to receive the tax benefits of donating to charity. You may want to consider accelerating 2018 contributions into 2017 to ensure you can take full advantage of the deductions. However, consideration should be given as to how this may affect your 2018 income should tax reform not end up passing.
- Increase retirement plan contributions –Even though it is the end of the year, there is still time to save! If you find yourself with extra income, make sure to contribute any excess to your retirement plan during the last few pay periods; if you receive a year-end bonus, you can also re-direct a portion of that to your retirement plan. Not to mention, you may qualify for a higher employer match.