Financial Planning Department
In “Part 2” of our Year End Tax Planning, below are more strategies you may wish to utilize prior to December 31.
- Bunch itemized deductions Taxpayers who do not have enough itemized deductions in a given year may want to consider bunching items together in order to exceed the standard deduction threshold, especially if the standard deduction increases in 2018 under the proposed tax bill, making itemized deductions even harder to qualify for in the future. This is especially useful in cases where an item must exceed a percentage of AGI in order to be deducted. For example, if you know that you (and your spouse, if applicable) might need certain medical procedures in the near future, it may make sense to schedule them within the same tax year so that you are able to meet the AGI threshold for deducting medical expenses.
- Contribute to a 529 College Savings Plan – If you would like to help someone save for college, a 529 College Savings Plan can be the perfect vehicle. These accounts let you contribute on a state tax-deductible basis (depending on where you reside) and distributions are tax-free if used for qualified higher education expenses.
- Be careful of year-end mutual fund purchases – Many mutual funds pay out dividends and large embedded capital gains at the end of the year, which will be reportable by the owner of the fund as of the ex-dividend date. While it may seem like a good idea to buy shares before this date in order to receive the extra income, it is important to be aware that the payout causes the share price to fall by that same amount. Not only that, but even if you automatically reinvest the dividends, you still have to pay tax on that income (assuming the shares are held in a non-qualified account). For some people, it may make sense to sell a mutual fund prior to a large capital gain distribution and reinvest that money in a low-cost ETF in the interim, then re-purchase the fund at a later date (again, be careful of the wash sale rules). Note that this situation usually only benefits people who are holding a fund without a large unrealized capital gain; otherwise, the sale of the fund will trigger its own capital gain on the net proceeds.
- Make gifts to family – Not only can you help your family financially, you can also receive a tax benefit by gifting certain property. For example, if you gift a stock or mutual fund prior to the ex-dividend date (as mentioned above), the new owner will be responsible for reporting the distributed income. This can make sense if you have a sizeable position with a large expected distribution and can shift the income to a beneficiary in a lower tax bracket than yourself. You can give $14,000 per year, per beneficiary free of gift tax. Giving property to family can also help you to reduce your estate.
- Review your withholding – To reduce the chances of owing money at tax time, make sure that your current tax withholding is as up-to-date and accurate as possible. You can use online tools to help calculate the correct amount; if you have been withholding too little, try to approximate the amount of additional withholding necessary to break even. To adjust the percentage for the final few pay periods of the year, all you need to do is file a revised W-4 with your employer.
- Remember your RMDs – If you are older than 70, make sure to take your Required Minimum Distribution from your retirement plans and inherited IRAs. While the IRS tends to be fairly lenient when it comes to missed RMDs (as long as the mistake is corrected), there is a chance that a potentially sizable penalty could be due (50% of shortfall) if the mistake is not forgiven.
- Consider AMT preference items While the Alternative Minimum Tax only affects higher income taxpayers, it is important to be aware of so that you can limit it, or avoid triggering it in the first place. Certain deductions, like state and local income taxes and property taxes, are not deductible under AMT. Before accelerating certain payments, make sure to consider how these might affect the AMT calculation.
If you are considering utilizing one or more of the above strategies, you may wish to consider having a MASTERPLAN done first. This financial plan will take a comprehensive look at your financial situation and assist you with tax-related issues, as well as uncover potential opportunities. Year-end tax planning is more important than ever in 2017 due to the numerous potential changes that could happen in 2018 if Congress passes new legislation. You should also consider the potential negative consequences for your 2018 taxes if you make any year-end adjustments based on the proposed changes, but those changes do not end up going through. We recommend that you review any tax strategies with an accountant prior to implementation to ensure all aspects of your situation are being considered, as each potential change may affect each individual differently.