'Tis the Season for Year-End Financial Planning

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by Samantha Pahlow, CTFA
Senior Vice President

Time seems to move faster as we approach the holiday season. Beyond the festivities, there are a number of year-end considerations that could potentially optimize your 2019 tax liability.

These year-end considerations may require some coordination, so now is the time to start making a plan. Here are the top areas we recommend you explore with your investment advisor and tax advisor in the coming weeks. Although many deadlines are December 31, addressing them soon could alleviate any last-minute angst you may encounter.

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Charitable Tax Planning — Because of the higher standard deduction provided under the 2017 Tax Cuts and Jobs Act, many taxpayers find that their typical annual charitable giving does not provide an additional tax benefit.  It is important to work with your tax advisor to determine whether strategies, such as bunching multiple years of giving into a single calendar year, using a donor advised fund or making qualified charitable distributions (QCDs) from your traditional IRA would increase the tax savings associated with your charitable giving.

Gifts May Take Time — Timing is very important for charitable donations made near year-end. As a general rule, a charitable donation is deductible in the year it is delivered to the charity. While transfers of cash can be completed relatively quickly, it is often more tax efficient to donate appreciated assets. And, depending on the type of assets being donated, the method of delivery, and institutions involved, it is often necessary to organize and complete such gifts in early December, allowing ample time for processing and delivery to the charity.

Maximizing Contributions to Retirement Plans — While contributions to traditional IRAs and Roth IRAs can be made up until April 15 of 2020, employee contributions to many employer-provided retirement plans, such as 401(k)s, 401(a)s, 403(b)s, and SIMPLE IRAs, must be made by December 31. Review your year-to-date contributions, and if you are falling short of the maximum allowed contribution ($19,000 for 2019, plus a $6,000 catch-up contribution for workers over 50), consider increasing your deferral out of your final paycheck. 

Roth IRA Conversions — If you anticipate that you may be in a higher tax rate in the future, you should consider partial conversions of a tax-deferred retirement account to a Roth IRA. Although the conversion will create taxable income in the year of conversion, it can result in long-term tax saving by paying tax at a lower rate in the conversion year than you would on distributions in a future year. This strategy should also be considered any time you will have uniquely low tax year, such as when making a large charitable contribution or perhaps when between jobs or recently retired with lower income years prior to claiming social security or beginning required minimum distributions from other tax deferred accounts.

Required Minimum Distributions — Those over age 70 ½ with retirement accounts and all individuals with inherited retirement accounts will need to verify that they have satisfied their required minimum distributions (RMDs) before December 31. An exception is made for RMDs from traditional IRAs if you turned 70 ½ in 2019, which will extend the deadline until April 1 of 2020; however, delaying this initial RMD into the following year will result in two RMDs recognized in 2020 (both the delayed 2019 RMD and the required 2020 RMD). The decision to delay the initial RMD should be made in concert with your tax advisor.

Health Savings Accounts Contributions to health savings accounts (HSAs) must be made by April 15 of the following year. If you have a high-deductible healthcare plan, you may be eligible to open and fund an HSA even if your employer doesn’t sponsor one as a part of the benefit package. These accounts are unique in that they can be triple-tax free. Contributions are deductible (up to annual limits), the funds grow tax-free, and withdrawals are tax-free when used for eligible medical expenses.

Flexible Spending Account Funds Unlike funds in HSAs, flexible spending account (FSA) funds don’t rollover from year-to-year. They are a use-it-or-lose it account and many must be spent by December 31. It is not uncommon to overlook funds set aside in FSA accounts, so take a moment to review any outstanding balances and plan to use them up before year-end.

529 Plans — If you are planning for the education of children or grandchildren, consider making an annual contribution to a 529 plan. Many states offer a tax benefit in the form of a deduction or credit for contributing to a 529 plan. Some states allow you to make a larger contribution up front and carry the benefit forward to subsequent years. For example, a married couple in Oregon is eligible for a state deduction of $4,865 in 2019 for contributions to Oregon 529 plans, and excess contributions can be carried forward to the next four years. However, starting with the year 2020, contributions to an Oregon 529 plan will generate a means-adjusted tax credit (rather than a deduction). Note that excess contributions carried forward from years prior to 2020 will continue to be allowed a deduction over the normal carryover period.

Annual Gift Exclusion — For 2019, each individual can give away $15,000 per recipient without incurring federal gift taxes or using up any portion of your $11.4 million lifetime transfer tax exclusion. These gifts need to be received and deposited by the recipient by December 31 in order to qualify. This can be an effective way to reduce your taxable estate.

Strategizing with your CPA and Portfolio Manager — Income tax rates, capital gains tax rates, the taxation of Social Security and Medicare premiums are based on levels of income. Depending on your circumstances, you may benefit from harvesting capital losses or even accelerating capital gains as part of a multiyear tax and investment strategy. It is also a good time to evaluate your projected income tax brackets for the years ahead and ensure your investment portfolio, specifically your fixed income investments, are designed for the best after-tax return.

Discussing these topics and any other changes in your financial situation, such as a new investment or sale of a business or home, with your tax advisor and investment professionals will allow them to review and make adjustments if necessary. Exploring these options now rather than waiting until year-end could make your holidays less hectic.

Disclosures