Check this List – Twice – Before Year-End
While keeping in mind your long-term investment goals, meet with your advisor and coordinate with your tax professional to examine nuances and changes that could impact your typical year-end planning.
Mind Your RMDs
Be thoughtful about required minimum distributions (RMDs) to ensure that you comply with the rules. If applicable and you have yet to do so, take your 2016 RMD to avoid a 50% penalty on required amounts not taken. Other considerations:
By automating your RMDs with your advisor, ensure that you never miss this important deadline.
You can take your first RMD during the year you reach age 70½, or you can delay it until April 1 of the following year. Know, however, that if you delay and take two distributions in the first year after turning 70½, your income could be inflated, which may affect your tax-bracket standing.
Subsequent RMDs must be taken no later than December 31 of each calendar year.
Qualified charitable distributions allow traditional IRA owners who transfer RMDs to qualified charities to exclude the amount donated from their adjusted gross incomes, up to $100,000.
Be mindful of how taking a distribution will impact your taxable income or tax bracket. If you have space left in your bracket or a down income year, you may want to consider taking additional distributions.
To Harvest or Not to Harvest
Evaluate whether you could benefit from tax-loss harvesting – selling a losing investment to offset gains or establish a deduction of up to $3,000. Excess losses also can be carried forward to future years. With your advisor, examine the following subtleties when aiming to decrease your tax bill:
Short-term gains are taxed at a higher marginal rate; aim to reduce those first.
Don’t disrupt your long-term investment strategy when harvesting losses.
Be aware of “wash sale” rules that affect new purchases before and after the sale of a security. If you sell a security at a loss but purchase another “substantially identical” security – within 30 days before or after the sale date – the IRS likely will consider that a “wash sale” and disallow the loss deduction. The IRS will look at all your accounts – 401(k), IRA, etc. – when determining if a wash sale occurred.
Manage Your Income and Deductions
Those at or near the next tax bracket should pay close attention to anything that might bump them up and plan to reduce taxable income before the end of the year.
Consider making a donation. Giving to a charity can benefit a cause you care about and reduce your taxable income. Make sure your gifts are well-documented. You also can gift up to $14,000 tax free to as many individuals as you wish.
Determine if it makes sense to accelerate deductions or defer income, potentially allowing you to minimize your current tax liability. Some companies may give you an opportunity to defer bonuses and so forth into a future year as well.
Certain retirement plans also can help you defer taxes. Contributing to a traditional 401(k) allows you to pay income tax only when you withdraw money from the plan in the future, at which point your income and tax rate may be lower or you may have more deductions available to offset the income.*
Evaluate your income sources – earned income, corporate bonds, municipal bonds, qualified dividends, etc. – to reduce the overall tax impact.
Evaluate Life Changes
From welcoming a new family member to moving to a new state, any number of life changes may have impacted your circumstances over the past year. Bring your financial advisor up to speed on major life changes and ask how they could affect your year-end planning.
Moving, for example, can have a significant impact on taxes and estate planning, especially if you have relocated from a high income tax state to a low income tax state, from a state with an estate income tax to one without or vice versa, or if you have moved to a state with increased asset protection.
Give thought to your family members’ life changes as well as your own – job changes, births, deaths, weddings and divorces for example can all necessitate changes – and consider updating your estate documents accordingly.
Consider these to-dos as you prepare to make the most of year-end financial moves, and discuss with your financial advisor and tax professional:
Manage your income and deductions, paying close attention to your tax bracket, especially if you are on the edge.
Remember to take your RMD, if applicable.
Evaluate your investments, keeping in mind whether you could benefit from tax-loss harvesting.
Make a list of the life changes you and your family have experienced during the year.
*Withdrawals prior to age 59 1/2 may also be subject to a 10% federal penalty tax. RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Raymond James advisors do not provide tax advice.
Material prepared by Raymond James for use by its advisors