It’s that most wonderful time of the year. Enough of the year has gone by that you have a pretty good idea as to the income and deductions you have incurred thus far and there is still time to take action before the end of the year. Outlined, below, are some general tax planning ideas that may be of interest to you.
Income Tax Planning
Ensure you are implementing tax reduction strategies like maximizing your retirement plan contributions, tax loss harvesting in portfolios and making charitable contributions, which can all help reduce current and future tax bills. Managing your tax bracket over multiple years is the best way to minimize your income tax bill under the new tax regime. The best way to do this is to run a multi-year tax projection to see if you can take advantage of strategies like bunching deductions into high income years, harvesting gains in low tax years or doing Roth IRA conversions. If there are anticipated changes that could affect your tax liability such as: filing status change; income change; retirement; medicare eligibility (to name a few), planning now for those anticipated changes may give you the opportunity to avoid unnecessary increases in your tax bracket.
The 2017 Tax Act lowered taxes through 2025. If you anticipate that rates will likely go up, this may be the time to add to your Roth account, either directly by contributing to your Roth 401k plan or Roth IRA, or if neither of those are an option, by converting monies already in an IRA to a Roth IRA. While taxes are incurred from the conversion to a Roth, the tax bracket may be lower today than when you would have pulled out those monies in the future. Roths also have the added benefit of not being subject to the RMD rules, so you can leave the account intact after age 70 ½
We find it is helpful to prepare a flowchart of your current estate plan to visualize what would happen to each of your assets and how the current estate tax law will impact you. Be sure that your estate planning documents are up to date – not just your will, but also your power of attorney, health care documents, and any trust agreements – and that the beneficiary designations are in line with your desires. If you might be subject to the estate tax consider annual gifting of up to $15k, paying medical expenses/tuition directly, and charitable giving. Don’t forget to consider the impact of any state estate taxes, which could differ from the Federal estate tax exemptions.
Equity markets have seen strong performance so far this year and this could have left your stock allocation higher than you are comfortable with. Regular portfolio rebalancing will allow you to maintain the appropriate amount of risk in your portfolio. If you are retired and living off your portfolio, you want to make sure your cash reserve is maintained to cover living expenses for some period of time so that you do not have to sell equities in a down market. Given the current low interest rate environment, it’s important to shop around for the best savings or money market rates for this cash.
If you are interested in learning more about what tax planning opportunities apply to you, please contact us so we can discuss.
Contact me today if you have questions or comments.
Susan A. Moussi, CPA, CFP®, CDFA SMD
Tax & Divorce Financial Planning Consultants, Inc.