How to Make the Most of Year End Tax Planning

Nov 04

There should be three times per year when tax planning should be front and center of your overall wealth management plan; Beginning (January/February), middle (June/July), and the end of the year (November/December).

Planning at the beginning of the year should be focused on the following;

  • What are your retirement contributions plans?  Are you focused on 401(k), IRA, or both?  If you are contributing to an IRA, can you contribute to a Roth?
  • What are your education savings goals?
  • If you qualify, will you be making HSA contributions?
  • Will you be making charitable contributions?  If so, will they be consistent contributions or more sporadic?
  • Do you need to make any adjustments for the loss of any exemptions which could have a significant impact on your tax owed?

Once you have your initial tax and wealth planning strategy laid out for the year, June/July, provides for an ideal stopping point to check in on your progress;

  • Have any life changes occurred that have had an impact on your plan (good or bad)?
  • Has your income changed up or down, which may allow more savings, thus reap more tax benefits? Or have you had to pull back on some plans, and if so, do you know how those may affect your taxes in the current year?
  • You want to try to minimize tax surprises when you prepare your return in the subsequent year.

The end of the year provides an opportunity to review your progress once again and allows for a small window for you to make any necessary changes.

  • Are you on track to maximize qualified retirement contributions?
    • 401(k) contributions need to be made by year-end.
      • $19,000 for 401(k)s an additional $6,000 for those over age 50
    • IRA contributions do not have to be made by the end of the year.  You have up until the tax deadline of April 15th to make contributions.
      • $6,000 for IRAs with an additional $1,000 for those over age 50
    • Regardless of how much you may contribute to a 401(k), I strongly encourage everyone to contribute enough to receive their company match.  Ensuring that your contributions meet the qualifications, it is essentially receiving free money.
  • Do you have an idea if you will qualify for the standard deduction, or do you have enough deductions to itemize?  Recall that the standard deduction has almost doubled for individuals and families to $13,000 and $24,000, respectively.  Here are a few items that could have any impact on which deduction you may qualify for;
    • Have you been making charitable contributions, or are you planning to make such contributions at the end of the year?
    • Have you had the ability to refinance your mortgage to a lower rate?  Remember that HELOC interest is still deductible if funds were used for home improvements.
    • Any material increase or decrease in your state and local taxes, which includes property tax?
  • If you have been contributing to an HSA, are you on track to reach the maximum contribution level?
    • $7,000 for families with an additional $1,000 for those over age 50
    • $3,500 for individuals with an additional $1,000 for those over age 50
  • Roth conversions, converting Traditional IRA funds to Roth status, must be made by December 31st.  There is no limit to the amount that can be converted; however, the amount converted is added to your ordinary income for the tax year.  Roth Conversions can be an excellent way to reduce future taxes.
  • Have you reviewed your taxable brokerage accounts for any tax-loss harvesting opportunities?  Gains can offset losses that can help you’re the amount of tax owed.

For questions about any wealth planning, portfolio management, or tax-related topics, do not hesitate to contact me to find out what options may be best for your personal situation.