As we approach year-end—before we all get caught up in our holiday preparations—we’d like to touch base on income tax planning. While we don’t give tax advice here at HJA, we’d like to share some thoughts for you to consider, then discuss with us and your CPA.
Capital gains and losses: Take a look at all of the realized gains year-to-date in your taxable holdings. Remember to take into account not only your managed portfolios, but also LLCs and partnerships. Consider harvesting losses to offset your gains, as well as an additional $3,000 above and beyond this. Realized losses above this amount can be carried forward to future years. If you like the security you’re selling at a loss, you can always buy it back – just remember to wait 30 days to avoid the wash rules.
Retirement plan contributions: When planning for year-end, don’t forget the simple stuff! Check your last paystub for your year-to-date 401k contributions, then determine if you’re on track to max out. The limit this year is $18,500, or $24,500 for those over 50.
In addition to tax savings for regular 401k deferrals (as opposed to Roth), you may have the added benefit of an employer match on your contributions. Be sure you’re taking all of the money they are willing to give you! Your Human Resource representative can assist with optimizing your contributions, as well as the match.
Aside from the 401k, you have a potential opportunity to take advantage of an IRA contribution. The maximum contribution is $5,500, or $6,500 over age 50, whether you are using a traditional or Roth. What you earn will impact whether you can do a Roth contribution, as well as whether you can deduct a traditional IRA contribution. Speak with your tax advisor to determine your options.
Roth conversions: With tax rates relatively low, now is a good time to consider a Roth conversion. By converting part of your traditional IRA to a Roth, you pay tax on it now but allow it to grow tax free in the future. Conventional wisdom has been to defer, defer, defer with the thought that your tax rate will likely be lower in retirement. However, you may have deferred so much that your required minimum distributions (RMDs) will push into a higher bracket when you take them out. Since we don’t know what rates will be in the future, you may think of this as a way to diversify your resources in retirement.
Gifts to charity: While writing a check is a simple way to accomplish a charitable gift, consider using appreciated (low basis) stock instead. The charity will have the same benefit, and it’s better for you. Here’s an example: if you paid $10 for a share of stock that’s now worth $100, you would trigger capital gains tax if you decided to sell it. However, if you gift that share of stock to a charity, it’s worth $100 to them—they don’t pay tax! If you liked the stock you gave them, you could always use your cash to buy more of it.
With the increase in the standard deduction this year (now $24,000 for those married filing jointly), there’s a chance you won’t actually receive a tax benefit from your contributions. You may consider “bunching” those contributions in order to get above the standard deduction limit; in other words, giving twice as much this year, then skipping a contribution in 2019.
If the idea of skipping contributions doesn’t appeal to you, consider establishing a donor advised fund (DAF). This allows you to make a deductible contribution in one year, then pass it out to charities of your choice over several years. The idea is roughly similar to a private foundation, with less expense. Donor advised funds are offered by numerous custodians, and community foundations.
Gifting to children and others: Under the annual exclusion, you can give up to $15,000 to anyone in 2018, or double that if you elect to split gifts with your spouse. For gifts earmarked for education, consider using a 529 plan. There are a number of different plans offered, so you’ll need to review to find the best fit based on investment options, expenses, and other benefits. The New York plan, specifically, allows a $10,000 deduction on your state income tax return for New York residents.
Depending on your circumstances, annual gifting could be a good option to remove assets and their future appreciation from your estate. This is especially true if you have a taxable estate; work with us and your CPA to explore ways to leverage this opportunity.
For those “better than 70 ½”: First and foremost, verify whether you’ve taken your required minimum distribution (RMD). Penalties for the failure to do so can be up to 50% of the amount that should have been taken, so this is worth double-checking! For the year you turn 70 ½, you have the option of waiting until April of the following year to take this – however, that means you’ll need to take two distributions in that year.
If you have not yet taken the RMD this year, or if you’re planning ahead for 2019 and beyond, think about a qualified charitable distribution (QCD). Under this arrangement, you can send your RMD directly to a charity—this works for amounts up to $100,000. While you won’t get a tax deduction for it, it also won’t count as part of your income. Consult with your tax advisor to see if this would benefit you.
We hope these ideas have gotten you thinking about your situation, and how to optimize your tax savings. Remember these are general topics only and shouldn’t be implemented without consulting your tax advisor regarding your specific situation; we’d be pleased to be part of this conversation.