October 12, 2017

We believe tax planning should be proactive and ongoing. A quick review before the New Year can help minimize taxes. Of course some tax regulations could change with the recently released tax reform plan proposed by the White House and Congressional Republican leaders. If the bill comes to fruition and passes, the timing of when the tax changes would take place is still unclear, but we expect the debate to drag out through the end of the year. Stay tuned.

Below are some items to consider to minimize your 2017 tax bill:

  1. Harvest capital losses in taxable accounts. Sell investments with a loss to offset realized gains on investments. If there are no gains, net capital losses (total capital losses minus total capital gains) may be used to offset up to $3,000 in ordinary income per year and any excess can be carried over to future years.
  2. Realize long-term capital gains in taxable accounts. If you’re selling appreciated securities, consider those that you’ve owned for a year or more. The maximum tax rate for these gains is 15% or 20% if you’re in the top tax brackets. If you’re in the 10% or 15% bracket, you can benefit from a 0% rate on long-term capital
  3. Avoid making a wash sale. A wash sale occurs in a taxable account when an individual sells an investment at a loss and then buys a substantially identical investment within 30 days of the sale. When this happens, the loss is disallowed for tax purposes. To ensure that losses are allowed, wait at least 31 days before
  4. Plan your itemized deductions. If you expect your income to decrease next year, for example if you plan to retire, deductions become more valuable this year. It may make sense to take more deductions in
  5. Consider deferring income (such as bonuses) until next year if you think you will be in the same or a lower tax bracket.
  6. If your income is higher this year, increase the federal and state tax withheld on your paycheck to avoid penalties for under-withholding. You can also make estimated tax payments throughout the
  7. Be aware of the Net Investment Income Tax (NIIT) when planning ways to minimize your income for the NIIT is a 3.8% Medicare surtax on net investment income (includes but is not limited to interest, dividends, capital gains, rental and royalty income, and non-qualified annuities) if your modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for a married joint-filer.1
  8. Use all of the funds in your Flexible Spending Account (FSA) by the end of the year. Amounts deposited into the FSA, which can be used for health and child care costs, avoid both income and Social Security tax. The funds in the account are lost if not spent by the end of the year (unless your employer has adopted a grace period permitted by the IRS and/or implemented a $500 maximum ‘carryover option’2).
  9. Generally, qualified medical expenses can only be deducted if itemized and if they exceed 10% of adjusted gross income. If you believe you are close to this threshold, paying qualified medical expenses before year’s end may provide you with some additional
  10. Give to charity. In addition to cash or physical household items, consider giving appreciated stock or fund shares that you’ve owned for more than one year to avoid paying taxes on the
  11. Take required minimum distributions (RMDs) by 12/31. RMDs are amounts that the federal government requires to be withdrawn annually from traditional IRAs and employer-sponsored retirement plans. Be sure you withdraw the funds from your eligible tax-deferred account(s) by December 31 or you will be subject to a 50% excise tax on the required amount. An exception may apply if you have an employer-sponsored retirement plan and are still working.
  12. Make a Qualified Charitable Distribution (QCD). A QCD can be made by someone age 70½ and older and is a direct transfer of funds up to $100,000 from your IRA, payable to a qualified charity. QCDs can be counted toward satisfying your RMDs for the year and are excluded from taxable
  13. Defer income and accelerate business expenses. This is a common strategy employed by business owners at year-end to limit their tax liability especially if you believe your company will be in a lower tax bracket next
  14. Be careful of buying mutual funds in taxable accounts in December. Some funds will distribute substantial capital gains around year’s end. Mutual fund capital gains distribution estimates are usually published in November and can be found on the funds’
  15. Avoid the ‘kiddie tax.’ The ‘kiddie tax’ taxes a child’s investment income above $2,100 at the parents’ rate and applies to children under age 19 and full-time college students under the age of 24 if they provide less than half of their own support from their own earned
  16. Consider converting your IRA to a Roth IRA. Factors to think about are the ordinary income tax you’ll incur to convert, your tax rate now versus later and the future plans for your estate. There is no income limit to convert. All qualified withdrawals from Roth IRAs are tax-free and penalty-free as long as you’re at least 59½ and the account has been open at least five years. Roth IRAs are not subject to
  17. Maximize your traditional 401(k) contributions to lower taxable income. The limit for 2017 is $18,000 plus another $6,000 if you’re age 50 or over.
  18. Contribute up to $5,500 to a traditional or Roth IRA; $6,500 if you are age 50 or older. Contributions to traditional IRAs may be deducted and Roth IRAs offer the benefit of tax-free growth. The phase out to contribute to a traditional deductible IRA begins at $62,000 for single filers and $99,000 for those married filing jointly (for active participants in a company plan). The phase out to contribute to a Roth IRA starts at $118,000 for single filers and $186,000 for those married filing jointly. Contributions can be made up until the tax filing deadline of the following
  19. Give a gift up to $14,000 per individual per year. This strategy will reduce the size of your taxable estate and help minimize or avoid the estate tax at the federal and state levels upon
  20. If you are or may be subject to the Alternative Minimum Tax (AMT), we recommend discussing tax reduction strategies with your tax

Carmichael Hill will assist you with tax planning, specifically tax loss selling, Qualified Charitable Distributions and Required Minimum Distributions. We recommend talking to your tax professional to review the other tips and discuss strategies for your unique circumstances.

-Jeff Grodsky, CFP®, QKA

 

Information contained herein is not offered as tax or legal advice and you should consult with your appropriate advisor for specific advice.

 

Sources

  1. irs.gov
  2. investodpedia.com
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