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Year End Tax Planning Checklist

By Karen DeRose, CFP®, CRPC® & Anthony DeRose, JD*, MBA, CPA*

Death and taxes, these are the two certainties in life. But are they? There are several planning strategies we can take into account in order to minimize this annual burden and keep more of your hard earned money.

This article hopes to provide a checklist which you can use to make sure you are doing everything within your power to abate your tax burden. While these strategies will not apply to all, we hope to provide a framework you can use to maximize deductions & credits and reduce your effective tax rate.

Tax Loss Harvesting

Realize losses on stock while substantially preserving your investment position. Generally this is done by selling a stock/bond at a loss, then subsequently buying back the same securities at least 31 days later in the new tax year (by waiting 30 days, this avoids something known as the “wash sale rule.” By following this strategy, you are able to recognize a loss to offset against capital gains in 2019, while preserving your position in the investment. We remain proactive to do this for our clients, but if we are not managing your investments, this is a strategy for you to consider. You must make sure you do this by calendar year end.

Max Fund your Qualified Plan

Lower your income by funding a retirement plan. Many of our clients are surprised at year end that they have yet to max fund their 401k/403b/457 plan. You have the ability to fund $19,000 into a 401k/403b/457 plan in 2019 ($25,000 if over age 50). You should take a look at your contribution year to date to be sure you are on track to fund your qualified plan by calendar year end.

Fund an IRA

Take advantage of the IRA. You have the ability to max fund an IRA at $6,000 if you are under age 50 and $7,000 if over the age of 50. We have covered this at great length in a past article, but your age/income will determine whether it makes sense to fund a traditional IRA (up front deduction, taxed at ordinary income rates upon withdrawal) or a Roth IRA (taxed upfront, not taxed upon withdrawal). Note that there are income limitations on Roth contributions. Also note that you have up until you file your taxes or 4/15 to make contributions.

Convert Traditional IRA to a Roth IRA

Convert! Depending on tax situation, it may make sense for you to convert your traditional IRA (or a portion thereof) into a Roth IRA. If you expect to have a low income year, you may consider converting, taking the tax hit in 2019, thus affording you the advantage of never having to pay taxes again on the IRA. This is a tremendous opportunity to provide tax free income, and also avoids required minimum distributions. Again, you have up until you file your taxes or 4/15 to make contributions to IRAs. Note conversions must be done in a calendar year.

Take Your Required Minimum Distributions

Avoid the penalty, take your RMD. For our clients over age 70 ½, please remember to take required minimum distributions from your retirement accounts before the end of the calendar year (with the exception of the very first distribution). The amount that should be withdrawn is generally calculated by dividing your account balance by an IRS estimate of your life expectancy, but in some cases, a much younger spouse's age must also be factored in. Retirees who do not withdraw the correct amount must pay a 50% tax penalty on the amount that should have been withdrawn, so it is crucial that you take your RMD. For example, if you are supposed to take $10,000 out and you do not, the penalty is $5,000, plus you have to pay tax on the $10,000. Thus, it is critical to make sure you take your distribution prior to the end of the calendar year.

Avoid Two Required Minimum Distributions in the Same Year

Avoid Doubling Up On Your RMDs. Your very first required minimum distribution can be delayed until April 1 of the year after you turn 70 ½. But all subsequent distributions are due by Dec. 31, so delaying your first withdrawal could result in two taxable distributions in the same year. Spacing out your distributions over two tax years may help you avoid getting bumped into a higher tax bracket. Also note, people who are employed after age 70 ½ can also delay withdrawals from their current qualified plan if not an owner, but not IRA, until April 1 of the year after they retire.

Take advantage of the HSA/FSA

Maximize your benefits! Tax advantages are but one piece of your total benefits package, which can include everything from making sure you elect the right health insurance (High deductible vs. PPO) to buying supplemental disability/life. Aside from your qualified plan, there are other benefits, which include an HSA/FSA. If you are part of a high deductible plan, you can make pre- tax contributions of up to $3,500 for an individual or $7,000 for a family in 2019 (if over 55, these values are $1,000 higher) to a health savings account (HSA). These contributions can be used for healthcare expenses each year, and if you do not use this account, it can be invested and grow; many of our clients use this as a “medical IRA” that can be used in retirement for healthcare.

If you are not part of a high deductible plan, you can take advantage of a flex spending account (FSA). This account works very similar to an HSA – you make pretax contributions to an account (up to $2,700) that may be used for your healthcare expenses. However, unlike an HSA, what you don’t use, you lose (other than your $500 which can be rolled to the following year), so make sure you use your FSA account by calendar year end. You also have the ability to fund $5,000 in a dependent care FSA which can be used for childcare expenses. Note you must open your HSA by the time you file your taxes.

Avoid Buying into Mutual Fund Capital Gains at Year End

Buyer Beware: Year End Mutual Funds. Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income. That's not how it works, exactly. Yes, you'd get the payout, but at the time of the payout, the share price falls by exactly the same amount. If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price. But the IRS doesn't see it that way. You have to report the payouts as income on your 2019 return—and pay taxes on them—even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)

Contribute to a 529 Plan

Fund College. If college is still burning a hole into your financial pocket, you may want to alleviate this burden by funding a 529 plan. Your contributions into a 529 plan go in after tax, grow tax deferred and if used for educational expenses, withdrawals are tax free. Also, note that some state 529 plans allow for a state income tax deduction. For instance, you may deduct up to $20,000 of contributions into an Illinois 529 plan, which would save you $1,000 on your taxes.

If you have any questions about any of these strategies, we are here to help. Please feel free to reach out to Anthony or I, or discuss any of these issues with your CPA to see if they benefit you.

Representatives of DeRose Financial Planning Group are registered representatives of Lincoln Financial Advisors.

Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice.