One Other Thing...

Todd Washburn |

Well, it’s here. Holiday season.  Or for us old-timers, it will be in a week.  Growing up, “the holidays” started on Thanksgiving, and Christmas shopping the next day. Of course, now days, the displays go up in stores late September and the ads don’t wait much longer.  Personally, I’m kind of nostalgic for the old days when we had that four week mad-dash.  It just seemed to have more energy.

Of course, the holidays aren’t the only thing to think about this time of year.  One, though not nearly as enjoyable, is year-end tax planning.  It’s time to take a last look before December 31st, while you can still do things to impact your bill for 2017.  Unfortunately, it’s being complicated this year by Congress attempting to push through a tax bill by year-end.  Some proposed changes may cause us to re-think some traditional year-end planning strategies- but we don’t know.  Please also keep in mind:  the tax code is complicated (duh), and I can’t cover all the twists and turns in an article like this, so if you think something might apply to you, do some research, talk to your financial adviser (or me), or reach out to your accountant (while they’re enjoying their last couple of months of fresh air and sunshine, they’ll be much happier hearing from you now than late January). 

So, with that said, there’s work to be done.  Here are a few things to check, think about, and/or do between now and year-end:

  1. Flexible Spending Accounts:  There are two types:  Medical and Dependent Care.  You set them up last year during benefits Open Season, but have you used the money up yet?  What’s left year-end reverts to your employer.  A couple of things to keep in mind:
    1. Even if you don’t use every dime, it still may have been worth doing.  As long as what’s left is less than the taxes you would have paid on the money put in, you won.
    2. For Medical accounts, you don’t have to wait for the money to be in the account to spend it.  The whole amount you agreed to contribute is available for spending the first day of the year.  If you spend it all and then leave your employer later in the year- not your problem.  This DOES NOT apply to dependent care accounts.  For them, the money must be there.
    3. Some employers give you up to 2 ½ months into the new year to submit claims, but not all.
    4. It’s Open Season at many employers right now.  If you haven’t been using these accounts, think about whether you should.
  2. Investments:
    1. The contribution limits for 401(k) and 403(b) plans (and similar- but not IRAs) are increasing in 2018 from $18,000 to $18,500.  The “catch-up” provision is still $6,000 for those age 50 and older.  Make sure you adjust your contributions for next year.
    2.  It’s been an amazing year in the stock market - with most things going up.  But, if by chance, you’re sitting on a loser, it might be time to let go, take the loss, and use it to offset some gains (from selling some winners).  Please note:
      1. If you sell a stock or mutual fund for a loss, securities rules prohibit you from buying that same stock/fund within 30 days before or after the sale.  You can buy a similar fund, but not the same.
    3. If you have money to invest, but it’s not in a retirement account, be careful when you invest it.  Many mutual funds pay out year-end dividends in Nov. or Dec. If you invest right before then, you’ll receive the dividend for the year.  Since you weren’t invested for the year, what you’re really getting is your own money back and the opportunity to pay taxes on it too.
    4. Required Minimum Distributions (RMDs):    With the exception of Roth IRAs (but not Roth 401(k)s or 403(b)s), once you reach age 70 ½ you must start making withdrawals from retirement accounts. The rules say you don’t have to take the distribution until April 1 of the year following the year you turn 70 ½.
      1. Careful here.  If your birthday is on or before June 30, you have to take the distribution by April 1 of the following year.  If it’s July 1 or later, you have until April 1 of the year after next to take it.  Here’s the catch:  say your birthday is June 28.  You must take a distribution by April 1 of next year.  You can take it this year, or wait until next (by April).  However, if you wait until Jan. 1, you’ll have to take two distributions in that year- one for the year you turned 70 ½, and one for the following year (the waiting until April 1 of the following year only applies to the first year- thereafter it’s by Dec. 31).  So you’ll be taxed on two distributions in one year.
  3. Charitable donations:  A lot of us make year-end donations to charities we support, and if we itemize deductions on our taxes, we can claim them.
    1. Over the years the IRS has tightened up on documentation for donations, so just make sure you get what you need from the charity.  Type of donation and the value impact the documentation needed.
    2. Donate appreciated stock: with the big run-up in the market, you may have securities that have gone up a lot- and for which you’ll owe taxes on the gains.  By donating this to a qualified charity, you’ll get both the deduction and avoid the taxation on the gain.  A double win for you and good for the charity too.
    3.  Qualified Charitable Donation (QCD) from an IRA:  A couple of years ago Congress made permanent the ability to make direct donations from IRAs to charities (assuming any new tax legislation doesn’t undo this).  A couple of things to note:
      1. You must be 70 ½ when you make the donation (not just going to be that year).
      2. The limit is $100,000 per year.
      3. A couple of advantages of making the contribution directly from the IRA, as opposed to withdrawing the money and then donating are.
        1. The withdrawal/donation doesn’t become part of your taxable income.
        2. Since you don’t pay taxes on the withdrawal, even if you don’t itemize deductions (and therefore couldn’t take the charitable deduction), you benefit tax-wise.
        3. It may help lessen taxation of your Social Security by not adding to your income.
        4. It can also be considered your RMD for the year- assuming:
          1. You didn’t need/want that money for living expenses
          2. You make the donation prior to RMDs being distributed (once distributed, they’re taxable).
          3. This means the RMD also doesn’t add to your taxable income.
  4. Visit your accountant:
    1. Do a year-end review to make sure there won’t be any surprises come April.
    2. If income is significantly more or less than anticipated, maybe an adjustment of your 4th Quarter estimated tax payment is warranted.

Is this an exhaustive list?  Nah.  Are there other things to consider?  Maybe, possibly, probably.   That’s why visiting your accountant or financial adviser is so important. Of course, this year so much of their advice is going to come with a big “but…” as we wait for D.C.

Have a great Thanksgiving!