7 Year-End Tax Planning Ideas

Jul 31, 2018

tax planning

As we transition to the second half of the year, it may be time to do some tax planning. There were some significant tax changes that could have an impact on 2018 and beyond. Are you interested in generating some tax savings ideas for your clients? If so, read on.

The following are seven tax tips to consider and remember before year-end.

1. Remind your clients to maximize their retirement saving

If your client turned 50 this year, they’re entitled to make a catch-up contribution of $6,000 for their 401(k) if their plan allows. It’s not too late to catch up for 2018. Also, anyone with compensation can contribute to a traditional IRA*. It’s the deductibility of the IRA contribution that is subject to income limits. Unfortunately, Roth IRA contributions do have income limits.

Come January clients can make their 2019 IRA contribution. Why not consider making the IRA contribution at the beginning of the year?

IRAs and Defined Contribution Plans

2. Review where your clients are with capital gains and losses.

Mutual fund capital gain distributions typically are announced during the fourth quarter. After taking distributions into account, what should your client do if anything? If your clients are in the 22% or higher tax bracket, tax-loss harvesting may make tax sense. Your client can harvest losses excess of their gains but are limited to taking $3,000 in losses in excess of gains. Losses not used in 2018 can be carried forward indefinitely for federal tax purposes.

There is a long-term capital gain tax rate of 0% in the two lowest (10% and 12%) marginal tax brackets. If you find clients with projected taxable income of less than $38,700 for single filers, or $77,400 for married filing jointly, they may want to recognize long gains, which could be taxed at a 0% federal tax rate. Tax-gain harvesting can be a tax-smart idea.

3. There were big changes to itemized deductions for 2018.

For instance, there are no more miscellaneous itemized deductions. State and local taxes (SALT) deductions are limited to $10,000 for married and single filers. These two changes alone will reduce the number of taxpayers itemizing their deductions. To itemize tax deductions, your clients will need to exceed the standard deduction. The standard deduction is something the government gives each taxpayer and taxpayers don’t have to complete Schedule A Itemized Deductions.

Due to the huge changes to itemized deductions, our research indicates that a key factor in itemizing will be charitable contributions. Let’s look at various ways to make charitable contributions.

First, filers need to make charitable donations by year-end. Contributions are deductible in the year they were made. Therefore, donations charged to a credit card before the end of 2018 count for 2018. This is true even if the credit card bill isn’t paid until 2019. Also, checks count for 2018 as long as they are mailed in 2018.

Consider gifting appreciated securities instead of cash, which is very tax inefficient. Gifting stock with a fair market value of $5,000 with a cost of $1,000 could save $952 in tax ($4,000 * 23.8%), plus your client still receives a charitable contribution deduction. The top marginal tax bracket federal long capital gain rate is 23.8%.

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4. Advanced Charitable Planning: Qualified Charitable Distribution

If retirees find themselves no longer a good candidate to itemize and are charitably inclined, they should consider a qualified charitable distribution (QCD). A QCD allows a tax-free transfer (up to $100,000) directly from an IRA to a qualifying charity. The taxpayer must be age 70½ at time of the distribution to be eligible. Also, a QCD must be done by December 31, 2018 to count for the current tax year.

When a taxpayer elects to make a required minimum distribution (RMD) a QCD, the taxpayer does not pick up the RMD as income, but also does not take the charitable contribution deduction. If your client is not planning to itemize, a QCD can be a tax-smart idea.

Donating the RMD to charity should reduce both adjusted gross income (AGI) and taxable income. Reducing income can produce potential tax benefits, such as:

  • Reduced Social Security benefits that are taxed
  • If AGI falls below $250,000 for married filing jointly (MFJ) or $200,000 for single, investment income will no longer be subject to the 3.8% Net Investment Income Tax.
  • Future Medicare premiums could be reduced

The Lump and Clump Strategy

As mentioned above, taxpayers that used to itemize may not be doing so unless they engage in some proactive planning before year-end. Here is an example.

Mr. and Mrs. Smith, ages 55 and 54 respectively, have the following 2018 projected itemized deductions:

Itemized Deductions Projected
Taxes Paid: $10,000 (limited)
Interest Paid: $11,000
Gifts to Charity: $2,500
Total Deductions: $23,500 (That’s less than the standard deduction of $24,000, so the Smiths will not itemize.)

What can the Smiths do? One strategy is known as the “lump and clump.” Instead of gifting $2,500 to charity in 2018, why not consider “lumping” four years of charitable donations in 2018. Then “clump” those donations into a donor-advised fund.

Itemized Deductions Projected (with lump and clump)
Taxes Paid: $10,000 (limited)
Interest Paid: $11,000
Gifts to Charity: $10,000
Total Deductions: $31,000 (That’s more than the standard deduction of $24,000, so the Smiths will itemize and get the full benefit of their charitable contributions.)

Though the Smiths may not want to dispense $10,000 of charitable contributions in one year, what can they do? They could “clump” the $10,000 in contributions into a donor-advised fund (DAF). The Smiths will receive an immediate tax deduction for the contribution to the DAF. In the future, the Smiths can decide what charities will benefit, but in the meantime, the monies can be invested. A final note, DAFs accept appreciated securities but will sell them once contributed with no tax bill back to the Smiths.

5. Almost everyone is in a lower tax bracket now.

This might be a good time to take advantage of the lower tax rates and consider doing a Roth conversion by December 31, 2018. Roth conversions don’t always carry a tax bill. Taxpayers can mitigate the tax bill by pairing tax strategies. For instance, your client could increase their charitable deductions to match the amount of their Roth conversion. Maybe a passive activity with suspended losses becomes unsuspended and that is great time to consider a Roth conversion. Remember there are no income limits for Roth conversions.

6. If your clients are considering gifting to family or friends, try to do it by the end of the year.

Taxpayers can give up to $15,000 to anyone without filing a gift-tax return. Consider gifting appreciated securities, which removes the gain from your client’s portfolio and possibly reduces the tax bill on the sale if the donee has a lower tax rate than the gifter.

Consider not gifting portfolio losers; it may be better to take the loss because someday your client might need it.

7. Why pay tax now when your client could pay later?

Generally, taxpayers want to accelerate deductions and defer income. There are plenty of income items and expenses clients may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, clients may be able to accelerate charitable contributions, state and local income taxes, and interest payments.

Tax planning is a year-round exercise that requires active participation. If you want to help lower your client’s tax bill, work with them and their tax coordinator in an effort to always call the right play.

*Traditional IRA Limitations Source: IRS

Please note that charitable substantiation requirements apply per IRA pub 1771: “A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization.”

The donor must get the acknowledgement by the earlier of the date the donor files the original return for the year the contribution is made, or the due date, including extensions, for filing the return.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.

Investing involves risk, including possible loss of principal.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

Before implementing any of the above suggestions, check with your financial advisor and or tax professional.

Tax loss harvesting is a strategy of selling securities at a loss to offset a capital gains tax liability. It is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains, though it is also used for long-term capital gains.



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