I suspect that a month or two from now, your inbox and social media feeds will be full of year-end tax-planning checklists and advice articles. But one of our mantras at Keen Wealth is, “get out ahead of issues as early as we can.” So on today’s show, we help our listeners get a jump on year-end tax planning. If you put off addressing these important items, you’re not just wasting time. You could be losing money.
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1. Don’t mistake tax planning with tax preparation.
Maybe you’re thinking, “Bill, I work with a CPA every year, I’m all set.”
But, in most cases, your CPA uses all the year-end tax info you’ll be collecting from your employer and financial institutions in January, February, and March to prepare your tax returns ahead of Tax Day next April.
What we’re talking about today are tax planning discussions that you need to have with your fiduciary advisor and CPA before December 31, 2018. These are adjustments to your portfolio and investments that could potentially influence the numbers that your CPA will be working with early next year.
We’re always happy to “quarterback” our clients’ tax planning and prep by coordinating with a CPA. And if you’re not currently working with a tax professional, we can help you find one. But the tax planning discussion and any agreed-upon adjustments have to take place before December 31st to affect your 2018 tax liability. It’s especially important you schedule a meeting this year so that we can analyze how the new tax laws could affect your tax picture.
So what kinds of items are on our year-end tax-planning checklist?
2. Tax Withholdings
Both individuals and working couples should review their tax withholdings. Any significant life events from the past year, like marriage or divorce, will impact withholdings. Also, the new tax laws made changes to tax brackets and eliminated many deductions and exemptions. As a result, there’s a chance you could be significantly over- or under-withheld. And while it can be fun to get a big refund check in the middle of the year, remember that check is really just the government paying you back an interest-free loan it took out of your paycheck.
And if your withholdings are too low? A higher tax bill, which is no fun no matter how you think about it. Our strategy at Keen Wealth for the majority of our clients is to try to keep withholdings as accurate as possible, ideally plus or minus $1,000 so that there’s no big surprise come tax time.
3. Required Minimum Distributions
If you are 70 ½ or older, you need to take a required minimum distribution (RMD) from individual retirement accounts every year, including IRAs and former employer 401(k) accounts. If you don’t, the IRS fines you 50% of what you should have withdrawn. You can use these IRS tables to figure out what you RMD should be for 2018. But there’s an easier option: come in and let us figure it out for you!
4. Charitable Contributions and Gifts
In addition to any year-end cash contributions you’re planning for causes and organizations close to your heart (up to $100,000 for an individual), you also have the option of making a qualified charitable distribution from your RMD. This can be advantageous for some folks because if you send your RMD directly to a charity, then you do not have to count that distribution as income. In some cases, you could also donate low-cost-basis shares of a security you own to a charity without triggering capital gains taxes.
You also have until the end of the year to make tax-free gifts of up to $15,000 ($30,000 for married couples), usually without having to file a federal gift tax return.
5. Tax-Loss Harvesting
In taxable investment accounts, it is important to review your holdings for potential tax-loss harvesting opportunities. It may make sense to sell investments that are down in value and lock in the loss for tax purposes. That loss on investment gives you some options. You can apply the loss towards any gains that you might have to lower your taxable gains for the year. Those proceeds can be reinvested in a similar security. Although, to avoid the wash sale rule, be sure you do not repurchase the same security or a “substantially identical” stock or security within 30 days of the sale.
Sound complicated? It definitely can be, which is why you need to talk through all of your options with a fiduciary advisor ASAP.
6. IRA Conversions
A few months ago a listener wrote in to ask us about converting part of a traditional IRA into a Roth IRA after December 31st to reduce last year’s tax liability. Unfortunately, as is the case with all the items discussed today, the IRS does not allow you to go back and make any money-saving adjustments that you may have missed once year-end deadlines have passed.
That’s why it’s so critical to start this conversation with your fiduciary advisor soon. Give us a call so we can help you cross “tax planning” off your to-do list before the holiday rush ramps up.
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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