Year-End Tax Planning
Here are some tax planning techniques to consider:
- Maximize the use of tax-deductible retirement plan contributions. The 401(k) annual contribution limit is now $18,500. If you are age 50 or older, you can contribute another $6,000 for a total of $24,000.
- Fund Health Savings Account (HSA). For 2018, those in high-deductible health-insurance plans can contribute as much as $3,450 before taxes. For families, the figure is $6,900, and those age 55 and older can contribute an additional $1,000.
- Spend flex dollars. Unused funds in Flexible Spending Accounts are typically forfeited at year’s end, so make sure to tap them for eligible health and medical expenses by December 31. Some plans offer a “grace period” of up to 2 ½ months to use FSA money. Other plans may allow you to carry over up to $500 per year to use in the following year. Bottom line, check with your employer to confirm your plan’s deadlines.
- Contribute to a 529. Such contributions must be made before the end of the year in order to take advantage of any state-income-tax benefits or to be eligible for the federal gift-tax exclusion.
- Consider a Roth-IRA or Roth-401(k) conversion. Converting an IRA to a Roth-IRA, or a 401(k) to a Roth 401(k), can be an effective technique to minimize long-term taxes on investment earnings. Though an upfront tax is due on conversions, none of the future income earned inside a Roth vehicle is subject to income tax. A Roth can therefore provide you and your family with decades of tax-free compounded earnings. A conversion is particularly effective if you can execute it in a low-income-tax-rate year. If you will be in a lower tax bracket in 2019, consider delaying a conversion to next year.
- Required Minimum Distributions. If you are age 70.5, you have until December 31, 2018 to withdraw your RMD from your IRA. If you are charitably inclined, it might make sense to use your RMD to gift to Charities, especially if you are no longer able to Itemize deductions. You are able to gift up to $100,000 of your RMD as “Qualified Charitable Distributions”. The amount gifted as part of QCDs is excluded from income, lowering your Adjusted Gross Income and Taxable Income.
- Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund. Donors receive two types of tax benefits for gifting appreciated securities to a charity: First, they receive a federal tax benefit for the donation. For example, a donor in the 45% tax bracket making a $10,000 gift would receive a tax benefit of $4,500 ($10,000 x 45%) for the fair market value of the gift. Second, tax on the built-in appreciation is eliminated. If you donated shares worth $10,000 that you purchased for $1,000 and you were in a 33% long-term capital gains tax bracket, you would eliminate the capital gains tax on $9,000 of appreciation ($10,000 value less $1,000 purchase price), saving $3,000 ($9,000 x 33%). If you have long-term investments (i.e., investments held for more than one year) with built-in gains (your purchase price is lower than the current market price) in your portfolio, consider donating them to fund your charitable contributions instead of making cash gifts.
- Make annual or one-time gifts to family members. If you have the financial means, consider making annual gifts to your children, grandchildren, or other heirs up to the annual exclusion amount ($15,000 per person). Also, consider transferring money in excess of the annual exclusion amount. Gifts in excess of the annual exclusion amount count toward an individual’s gift tax exclusion amount of $5,600,000 (in 2018). This exclusion applies at the donor level and any gifts excluded due to the lifetime gift tax exclusion are counted against a donor’s estate tax transfer exclusion at death. Gifts not only reduce your estate’s value, but can also reduce your family’s income tax liability by shifting assets and the related income generated to family members who may be in a lower tax bracket.
We welcome the opportunity to discuss these topics with you. As with all tax planning, every person’s tax situation is different. Before implementing any of these strategies, we would strongly urge you to contact your Tax Advisor and Wealth Manager.