The hustle and bustle of the season are upon us and the clock is quickly ticking down toward December 31st. We generally discuss long-term planning with our clients and you should have most of your tax planning in place and complete by this time. However, there are always procrastinators and fortunately, there are some things that can still be done before year-end to assist with your tax planning.
Required Minimum Distributions (RMDs) are distributions that are required to be taken from your IRA, 401(k), 403(b), and 457 plans if you are age 70 ½ or older. The RMD was developed to force the account holder to withdraw some of the funds instead of letting them continue to accumulate tax-deferred over a longer period of time. Be aware that if are required to take an RMD, there is a penalty of 50% of the calculated RMD if you fail to take it before year-end. You may request a waiver of the penalty for reasonable cause but “I just forgot about it” generally doesn’t fall under a reasonable cause. Make sure you’ve taken enough from your account to satisfy the RMD. Generally, the financial institution that holds your account will notify you of this amount but if you’re not sure, we can assist you.
Tax Loss Harvesting is something else to be aware of. This term is used to describe selling investments at a loss in order to offset investment gains incurred earlier in the year. A taxpayer may deduct net losses of $3,000 against ordinary income on their tax return. So, if someone has a realized gain of $5,000, meaning they sold an investment at a gain, and had another investment that stands at a loss of $4,000, they could sell it and pay tax on only $1,000 of gain. If the investment sold at a loss is a good investment that is temporarily down, you can repurchase it after waiting 31 days to avoid what is known as a ‘wash sale.’ A wash sale will poison the potential tax loss harvesting. Tax loss harvesting takes advantage of losses effectively turning lemons into lemonade.
Charitable Contributions are always worth considering at this time of year but with recent tax law changes, this deduction requires a little more long-term planning than in previous years. Because of the changes in the standard deduction and the limitation on taxes, many taxpayers will find their charitable contributions offer no tax benefit. It is important to review your situation prior to year-end to determine if it is best to itemize or take the standard deduction.
A factor that is worth exploration on this topic is that if you are subject the RMD, you may make contributions directly from your IRA. Those distributions can count as your RMD but are not taxed as you won’t receive them; however, you can’t take a deduction for them, but if you can’t itemize anyway, it makes it a no-brainer. You can also consider bunching and alternating deductions or a Donor Advised Find (DFA) to secure a charitable contribution before year-end.
These suggestions are very broad in nature and wouldn’t apply to everyone as each person’s tax situation is unique. Instead of regarding these as iron-clad recommendations, consider them as issues to discuss with your tax advisor or financial planner to see if any of them are right for you. Taking a proactive approach can help save money in the short-term and be an integral part of saving larger amounts over time.