US News and World Report | Annalyn Kurtz| Dec. 4, 2017
The end of the year is always a good time to do some financial housekeeping, but this year in particular, uncertainty about tax reform may mean investors should throw a few more tricks onto their to-do lists.
Here are some of the most common tax tips financial planners are giving their clients this year.
Sell your portfolio losers. Hopefully, losers are hard to find in your portfolio this year, given large gains in the stock market. But comb through your investments and consider selling any losers.
“Known as tax-loss harvesting, if you have any positions in non-tax deferred accounts that are still sitting at a loss this year, go ahead and sell them before year-end and take the capital loss on your tax return,” says Lea Ann Knight, principal and director of wealth management at North American Management in Boston, Massachusetts.
“If you like the stock, you can always buy it back in 30 days,” she adds. “It’s hard to find losses in equity positions this year, but there are likely to be some bond positions sitting at a loss.”
Max out your savings and retirement accounts. If you’re getting a year-end bonus or can manage the cash outflow, be sure to max out your 401(k), individual retirement and health savings accounts this year, says Chris Jaccard, a financial advisor with Financial Alternatives in La Jolla, California.
The contribution limits for most Americans for 2017 are $18,000 for a 401(k) and $5,500 for an IRA. For an HSA, the limit is $3,400 for an individual and $6,750 for a family. Remember, you can make additional catch-up contributions if you are over age 50 in the case of retirement accounts, and age 55 with an HSA.
Technically, you have until tax-filing time to fully fund these accounts, but “it makes the record keeping easier for you if you fund the accounts in the same calendar year,” says Kathleen Campbell, the founder of Campbell Financial Partners in Fort Myers, Florida.
Take your required minimum distribution. This is a big one, particularly for investors over age 70.5, as well as people who have inherited IRAs.
When savers fail to take their required minimum distributions properly, the penalties can be severe at 50 percent. Typically, IRA holders must take their first RMD in the year in which they turn age 70.5. While the first year’s payment can be delayed until April of the following year, in all subsequent years, the withdrawal must be taken by Dec. 31.
If you like to give to charity, you can also consider giving your required minimum distribution to charity, says Patrick Chu, co-founder of Marrick Wealth in Irvine, California. IRA-holders over age 70.5 can make what’s known as a “qualified charitable distribution” directly from their IRA straight to a charity. You don’t have to disclose the income. QCDs are allowed up to $100,000 and can lower your gross income for Medicare, plus the charity receives the full value.
Front-load your charitable contributions in 2017. The current tax reform proposal increases the standard deduction, meaning fewer taxpayers will be eligible to itemize deductions in 2018. As a result, you may want to give more to charity this year to maximize your tax deduction.
“Many people may not itemize next year, given the possible higher standard deduction. So, they may be better off making extra charitable contributions this year,” says Susan Strasbaugh, founder of Strasbaugh Financial Advisory in Colorado Springs, Colorado. “With increased stock prices, donating appreciated stock, especially through a donor-advised fund, makes a lot of sense right now.”
Also, remember to keep good records to justify the claimed value of donated items, says Joseph Alfonso, founder of Aegis Financial Advisory in Cupertino, California. Any cash gifts over $250 require a receipt or letter from the charity, and donations should be made by Dec. 31 to count for the tax year.
Prepay your property and state taxes. If you typically itemize deductions, remember you may no longer be eligible to do so if tax reform is signed into law next year. As a result, you may want to prepay the first installment of your 2018 property taxes before Dec. 31, to net a larger deduction this year, Chu says.
“This may be a consideration if you had a larger than expected income in 2017 or think your income may be less in the future,” he says. “In addition, we may be losing the benefit of this deduction altogether.”
Likewise, Chu encourages clients to consider prepaying their state income taxes. The current tax reform bill does away with deductions for state and local income taxes.
“Similar to the property tax prepayment, if you are going to owe the state come April 15, you might consider prepaying those taxes before year-end to take advantage of a larger deduction against your federal taxes. This deduction may also go away in 2018,” he says.
Check your mutual fund distributions. If you hold any actively managed mutual funds, make sure you check your estimated year-end distributions. This has been a good year for the stock market, and as a result, many mutual funds have realized large gains.
“Your mutual funds could be about to make substantial distributions which could significantly impact your tax situation outside of your control,” says Kirsty Peev, a portfolio manager for Halpern Financial in Ashburn, Virginia.
Likewise, if you’re in the market to buy a mutual fund, don’t buy one right before it’s expected to make a large distribution, says Mark Wilson, president of MILE Wealth Management in Irvine, California.
“If you buy one of these funds before year-end in a taxable account, you will be paying more taxes than you want to,” he says. “If you are making year-end mutual fund purchases, find out how much (if any) and when they are distributing to avoid any surprises.”
Wilson runs a website, CapGainsValet.com, which tracks year-end distributions. By his count, more than 320 mutual funds are set to make taxable distributions of more than 10 percent of their net asset value this year.