Planning Strategies I am Thankful for this Year: Ten Ideas to Consider Before Year-End

The holidays can be a busy time with parties, family commitments and shopping, not to mention approximately 400 college bowl games. Despite the flurry of activity, it is also a time when some diligence around personal finance can help reduce your tax liability, protect your family, and set yourself up for a great 2018.

Takeaways:                                                                        

• End of year offers many important financial deadlines
• By taking action now you can help manage your tax situation and protect your family
• Ten select strategies that are particularly actionable this time of year
• Get ready to do “beginning of year” planning in early 2018

Ten strategies to consider before year end.

1. Complete Charitable Contributions
   deadline: 12/31
   The season of giving is a great time to make donations to charity that can not only benefit causes, but also help your tax situation. While cash donations are most popular they are far from the only or even best option for many.  Choosing instead to gift highly appreciated assets like stock can carry the same warm-glow while also helping you avoid capital gains tax. Additionally, donor-advised funds can offer the flexibility of a donation now and distributions to charity later.  Finally, if you are over age 70 ½ and have an IRA, consider having the IRA trustee make a transfer of your minimum required distribution directly to charity.  This can be done up to $100,000 annually and would need to qualify under the “qualifying charitable distribution” rules.  These and many other options should be carefully considered as your family’s unique situation will determine which offers the best fit.

2. Take Your Losses
   deadline: 12/31
   As you rebalance your portfolios, it may be a good time to take advantage of tax loss harvesting.  With this strategy, the idea is to utilize some of your embedded losses on your security holdings to offset any gains that may result as you shift among your asset allocations.  In addition to offsetting capital losses, each year investors are allowed to claim up to $3,000 in losses to offset ordinary taxable income. If you have assets in your account that have declined in value, now may be the time to consider selling them to take advantage of this for tax year 2017. After the sale, a re-investment in a similar security can maintain your asset allocation while still allowing the realization of the loss to drive tax savings.  Caution should be had in that the wash sale rules do not trip you up.

3. Double Check Required Minimum Distributions
   deadline: 12/31 for those currently taking distributions, 4/1 for first timers
   If you are over 70 ½ you are no doubt very familiar with Required Minimum Distributions from qualified accounts. However, even a veteran of the process could benefit from a quick double-check of their numbers due to the stiff penalty assessed by the IRS on errors (50%).

Here are several common errors to avoid.

Failing to include all employer-sponsored retirement plan balances (profit sharing, 403b, IRAs etc,)

Using an incorrect balance on first year calculation (investors should use the December 31st balance of the year before the first RMD year, even if the actual RMD is not taken that year)

Missed RMD deadlines (12/31 in all but your first year, for first timers it is 4/1)

Confusion around rules while still working for the company who sponsors the plan (non-IRAs paid by current employer may be excluded in some cases)

Incorrect exclusion of inherited Roth IRAs

Failing to consider the “qualifying charitable distribution” option to minimize your taxes

4. Use remaining Flex Spending Balances
   deadline: check your plan- 12/31 for many, 3/15 for others
   Flexible spending accounts are an important benefit allowing tax-free medical expenses, childcare and commuter expenses via salary deferral, but with this flexibility come deadlines. Check in on your flex- spending account balances to ensure they’ll be zeroed out by the deadline (typically 12/31 or 3/15). If you have unused balances on the healthcare side, flu shots, eyeglasses, a trip to the chiropractor or even acupuncture can ensure you benefit from these pre-tax dollars.

5. Review Health Savings Account Contributions
   deadline: for payroll contributions, generally the last pay period established by the employer; for direct contributions to HSA, tax filing deadline (April 17 for 2018!).

If you qualify for a Health Savings Account (HSA), you should consider maximizing your contributions to this account. The aggregate (employer and employee) contribution limit for 2017 is $3,400 (Single) and $6,750 (Married Filing Jointly). An additional catch-up contribution of $1,000 is allowed for those 55 or older.

6. Update Your Digital Asset Inventory

While there is no deadline associated with this final item, it is a good idea to get on an annual schedule to review all of your important documents. We discussed the need for a digital asset inventory in a previous article, but it should be noted the real value comes only if this list is kept current. If you haven’t yet created a digital asset inventory, consider using the end of year as an excuse to close the gap.

7.  Review bunching of itemized deductions.  

    deadline: at least by 12/31, but should be reviewed much earlier

In some situations, due to the relationship of the standard deduction and itemized deduction as well as the detailed rules regarding itemized deductions (i.e., certain thresholds, phaseouts), it will be beneficial to review your income tax situation on a multi-year basis.  With analysis, you or your advisor may be able to determine whether it is beneficial to bunch certain itemized deductions in one year vis-à-vis the other year. 

For example, if you could not exceed the hurdle of 2% of adjusted gross income (“AGI”) for Miscellaneous Itemized Deductions in one particular year, you should consider postponing some of the contributions until the following year if the aggregate for the following year would allow you to exceed the thresholds.  Deductions that deserve particular attention include those Miscellaneous Itemized Deductions (job expenses, tax preparation fees, safety deposit fees, investment expenses) and medical expenses.  Of course, the more ideal approach is to consider these options throughout the year.

8. Review timing of deductions and income.

     deadline: at least by 12/31, but should be reviewed much earlier

Similar to the concept of bunching some deductions in one year, you should review your income taxes on a multi-year basis to determine whether to accelerate deductions in 2016 and/or whether to defer income to 2018. Deductions to consider accelerating include state income tax (that would otherwise be due by your state’s deadline), property taxes, tuition (to take advantage of the American Opportunity Tax Credit if you qualify), and charitable contributions.  In some cases, it may make sense to accelerate your income. For example, if you anticipated in being in a much lower income tax rate in 2018 than 2018.  You may want to consider selling stock this year to recognize gain, exercise stock options.

9. Review Conversion to Roth IRA. 

    deadline: technically by 12/31 but talk to your provider on timing issues

As everyone is accustomed to hearing this strategy, it should not be taken for granted.  Consider whether it is beneficial to convert your Traditional IRA to a Roth IRA.  While the conversion to a Roth IRA is generally taxable as ordinary income in the year of conversion, the Roth IRA can grow tax free. Furthermore, the minimum required distribution rules do not apply to an individual’s own Roth IRA.  Many prefer not to pay income taxes up front, but the long-term advantages of converting a portion of the IRA may outweigh paying taxes earlier. As is the case with most financial decisions, the known often trumps the unknown. Of course, detailed analysis is especially warranted for this decision. 

10. Evaluate the Good and Bad for 2017

    deadline: midnight New Year’s Eve.

 In preparation for our 2018 Resolutions and Personal Plan Guide (look for it), write down three positive things and three things you would like to change regarding the following: career (e.g., what major projects are you glad you took on? what projects do you wish you would have taken on? What courses or seminars should you have taken? What steps did you take to increase your income?), expenses (e.g., what are major purchases you wish you could take back? What categories should you reduce expenses), time management (e.g., organization skills, time wasters, saying no), and planning issues (e.g., income tax strategies, retirement moves, investment steps, estate planning).  Don’t spend a lot of time here. The purpose is to set yourself up for completing 2018’s Resolutions and Personal Plan.