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Don’t Feel Taxed this Holiday Season

As we roll back the clocks and look forward to the holiday season, it’s important to give some thought to year-end financial planning to be sure that any opportunities that expire at year-end are addressed in time to execute them before toasting the New Year.

Here are 4 financial planning items to consider as we approach 2018:


1. Year-End Giving

You may be considering giving financially, either to a charitable cause or to family and friends. Monetary giving is always a great way to give back or make an impact; however, each method of giving carries different considerations.

  • Charitable Giving: It’s often a good idea to make a charitable donation prior to year-end so you can take the tax deduction sooner. If you’re unsure which charity you wish to support, you can use a donor advised fund, which accelerates the deduction but leaves you time to determine the charity in a later year.

If you’re considering giving appreciated securities instead of cash, keep in mind they should be long-term to get the deduction at fair market value rather than at cost.

It may not make sense to make the donation in 2017 if you have already hit the adjusted gross income (AGI) limit for donations and have carryovers from prior years that should be used.

It may also not make sense to make the donation in 2017 if you expect to be in a higher tax bracket next year, as waiting a year may provide you with a larger deduction.

  • Gifts to Family and Friends: Each year, you can gift tax free up to a certain amount, meaning the gift doesn’t use any of your lifetime exemption for federal gift/estate tax purposes. For 2017, the limit is $14,000 per recipient. A gift is a great wealth transfer technique and is a “use it or lose it” strategy.

2. Deductions

Outside of any deductions for charitable giving, there are other deductions you should consider taking before year-end, rather than in the New Year. These include expenses you can take as itemized deductions, such as:

  • Medical expenses
  • Real estate taxes
  • State income taxes
  • Interest payments
  • Certain professional fees

When making the decision to take deductions, it’s important to understand whether you expect to be in a lower tax bracket this year or next, and whether you will be subject to the alternative minimum tax (AMT). If you will be subject to the AMT, you may not get the benefit of the deduction. Therefore, frontloading it won’t help.

The tax system and phase-outs on deductions is complex, and if you’re unsure how deductions can work for you, it may make sense to have your accountant run a current-year projection with (and without) certain deductions. This projection will also help catch any expiring carryforwards about which you may not have been aware.

3. Investment items

Before the end of the year, it’s a good idea to review your investments to see what opportunities exist. A few to keep in mind are the following:

  • Capital Loss Harvesting: 2017 has been a strong year in the markets so far, so the opportunities in this area may be sparse. That said, it’s always worth a review of your investment holdings to see if any are underwater and could be sold to generate a loss to offset other gains you have realized. The idea with this strategy is that if you still want to hold the position that is at a loss, you can buy it back after 30 days (to avoid the wash sale rule) or you can buy something that gives you similar exposure, but is a different security (for example, a large cap index mutual fund vs. a large cap ETF). This way, the impact on your investment allocation is minimized while you take advantage of a tax loss to offset other gains.

If you’re unsure whether the securities you are considering are different enough, you should consult with your accountant.

  • Write-offs of Certain Investments: If there are investments in the portfolio that have become worthless, you should talk with your accountant to determine whether you can write them off and what substantiation is required to do so.
  • Mutual Fund Planning: It is typical at year-end for many mutual fund companies to make distributions. If you are planning to sell a mutual fund soon, it is worth considering selling before the ex-dividend date so the whole amount will be taxed at the long-term capital gain rate (as long as it has been held for at least 12 months). If sold after the ex-dividend date, the portion that is distributed as a dividend may be taxed as ordinary income and at a higher rate.

Similarly, if you are planning to purchase, it may be beneficial to purchase after the ex-dividend date to avoid possibly being taxed at ordinary rates on an immediate distribution.

4. Required Distributions

There are a handful of entities that have required minimum distributions (RMDs), and typically the RMD is measured on a tax year. Here are a few examples you’ll want to consider:

  • Private Foundations: Private foundations currently have a required minimum distribution of 5%, so it’s important to track how much the foundation has given and if it has any carryover from prior years. Certain giving expenses for the foundation can also count toward the 5%. Like personal giving, if your foundation isn’t sure yet of the final charity to receive the funds, it can make a grant to a donor advised fund by year-end and decide in the future how to distribute these funds.
  • Retirement Accounts: Once you turn age 70 1/2, it’s important to remember your RMDs from your retirement accounts. The custodians often have tools for helping with the calculation and distributions, though you should ensure all accounts are accounted for if you have more than one.
  • Trusts: Certain trusts have income distribution requirements. If you’re unsure of the timing or how the distribution amount is calculated (often defined in the trust document or by state law), it’s best to consult with your accountant or estate attorney for help.

Since many of the above items have several steps involved for execution after a decision is made, it is best to start early. Hopefully by starting early, you’ll be able to enjoy the holiday season and not be feeling taxed by the chase for final deductions, write-offs or other requirements in the final week of the year!

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