End-of-the-Year Money Moves
Here are some things you might want to do before saying goodbye to 2018.
What has changed for you in 2018?
Did you start
a new job or leave a job behind? Did you retire?
Did you start a family? If notable changes occurred in
your personal or professional life, then you will want
to review your finances before this year ends and
2019 begins.
Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.
Do you practice tax-loss harvesting?
That is the
art of taking capital losses (selling securities worth
less than what you first paid for them) to offset your
short-term capital gains. If you fall into one of the upper
tax brackets, you might want to consider this
move, which directly lowers your taxable income. It
should be made with the guidance of a financial
professional you trust.1
In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax.1
Do you want to itemize deductions?
You may just
want to take the standard deduction for 2018, which
has ballooned to $12,000 for single filers and $24,000
for joint filers because of the Tax Cuts & Jobs Act. If you
do think it might be better for you to itemize, now
would be a good time to get the receipts and assorted
paperwork together. While many miscellaneous deductions
have disappeared, some key deductions are
still around: the state and local tax (SALT) deduction,
now capped at $10,000; the mortgage interest deduction;
the deduction for charitable contributions, which
now has a higher limit of 60% of adjusted gross
income; and the medical expense deduction.2,3
Could you ramp up 401(k) or 403(b) contributions?
Contribution to these retirement plans lower
your yearly gross income. If you lower your gross income
enough, you might be able to qualify for other
tax credits or breaks available to those under certain
income limits. Note that contributions to Roth 401(k)s
and Roth 403(b)s are made with after-tax rather than
pre-tax dollars, so contributions to those accounts are
not deductible and will not lower your taxable income
for the year. They will, however, help to strengthen
your retirement savings.4
Are you thinking of gifting?
How about donating
to a qualified charity or nonprofit organization before
2018 ends? In most cases, these gifts are partly tax deductible.
You must itemize deductions using Schedule
A to claim a deduction for a charitable gift.5
If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state).2,6
Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift a number of people up to $15,000 each. A married couple can gift up to $30,000 in 2018 to as many people as they desire.7
While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.
Should you convert all or part of a traditional IRA
into a Roth IRA?
You will be withdrawing money from
that traditional IRA someday, and those withdrawals
will equal taxable income. Withdrawals from a Roth
IRA you own are not taxed during your lifetime,
assuming you follow the rules. Translation: tax savings
tomorrow. Before you go Roth, you do need to
make sure you have the money to pay taxes on the
conversion amount. A Roth IRA conversion can no
longer be recharacterized (reversed).8
Can you take advantage of the American Opportunity
Tax Credit?
The AOTC allows individuals
whose modified adjusted gross income is $80,000 or
less (and joint filers with MAGI of $160,000 or less) a
chance to claim a credit of up to $2,500 for qualified
college expenses. Phase-outs kick in above those
MAGI levels.9
See that you have withheld the right amount.
The Tax Cuts & Jobs Act lowered federal income tax
rates and altered withholding tables. If you discover
that you have withheld too little on your W-4 form so
far in 2018, you may need to adjust your withholding
before the year ends. The Government Accountability
Office projects that 21% of taxpayers are withholding
less than they should in 2018. Even an end-of-year
adjustment has the potential to save you some tax.10
What can you do before ringing in the New Year?
Talk with a financial or tax professional now rather
than in February or March. Little year-end moves
might help you improve your short-term and
long-term financial situation.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate; however, we make no representation as to its completeness or accuracy. Please note: investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1. nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/ [4/16/18]
2. marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15 [10/15/18]
3. hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/ [10/10/18]
4. investopedia.com/articles/retirement/06/addroths.asp [2/2/18]
5. investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp [10/1/18]
6. savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth [9/27/18]
7. fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx [6/28/18]
8. marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [9/15/18]
9. fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx [3/17/18]
10. money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding [10/16/18]
Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. Rajesh Jyotishi is a registered representative of Dempsey Lord Smith, LLC, which is a registered broker-dealer and a member of FINRA/SIPC. Advisory Services are offered through Dempsey Lord Smith, LLC. Rajesh has been a resident of Atlanta since 1975 and in the financial services industry since 1991. For questions, he can be reached at 770-884-8175 or at RJ@shalinfinancial.com. |
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