taxes

2019 Financial Planning Year-End Checklist

The holiday season is a time for family and reflection.  Hopefully, it will also leave some time to take stock of your finances. As the calendar resets in a month or so, it is wise to remember some important financial end of year to-dos to make sure you have maximized your situation by lowering taxes, bringing portfolios back into balance and your estate planning is up to date.  Happy Holidays and may you have a wonderful 2020!

 

 

         Consider funding a Donor Advised Fund with appreciated assets.  One larger contribution that can fund your charitable giving for many years can help push your deductions high enough to itemize, and it avoids capital gains taxes on the appreciation.

 

 

  •          Harvest capital losses.  After a year like 2019 when practically all asset classes rose, it may be hard to find losses, but there are always those that struggled.

     

  •          For those 70 ½ or older or have an inherited IRA, make sure you take your RMD to avoid paying a 50% penalty.

  •          Also, for those 70 ½ or older that have Required Minimum distributions from their IRA, a preferred way to donate to money to a charity is thru a Qualified Charitable Distribution. These payments count toward satisfying your RMD for the year (up to $100,000) and are excluded from income for tax purposes.

  •          If there are any changes to your estate plan or beneficiaries, make sure you will (you have one, right?) has your final wishes.

     

  •          You have until April 2020 to make your IRA contributions, but if you already know what kind of contribution you will be making (Roth, tax-deductible traditional), now is a great time to make it. Remember, the contribution limits are up to $6,000 for those under 50, and $7,000 for those 50 and older.

     

  •          Decide when you are making that property tax payment.  With the new lower deduction for state and local taxes of $10,000, it may not be as critical, but some still benefit from choosing which year to make the payment.

     

  •          If you happen to have a lower-income year, take advantage by thinking about a Roth conversion. Filling up your low marginal income-tax-rate buckets with income from moving dollars from traditional to Roth IRA may pay long term benefits.

     

  •          Reallocate your investments.  After such a strong year in the equity markets, you may be tilting a bit stock-heavy in your portfolio.  Consider taking some chips off the table and trim strong performing growth stocks in favor of value and international equities and high-quality bonds.

     

  •          Remember the words of Bob Harris from the film Lost in Translation (2003) “The more you know who you are and what you want, the less you let things upset you.”

 

 

 

 

 

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

How you Use Your Accounts can Significantly Affect How Much of Your Assets are Actually Yours

To calculate your net worth is it accurate to add up your assets and subtract your debts. Not quite. Some of your assets are actually the government’s!

Your 401-K and IRA contributions were deducted from your income, so the government still needs to collect taxes on this money.  The funds you, or your beneficiaries, withdraw is counted as income for tax purposes.  Even your brokerage account, in which your deposited post-tax dollars, still have embedded capital gains which will be paid when sold.  The government’s stake in your accounts are a function of your future earnings and the marginal tax at the time you either sell stock (in your brokerage accounts), or withdraw the funds (from tax-deferred accounts such as Traditional IRAs and 401-Ks).  Only tax-free accounts like 529s, Health Savings Accounts and Roth IRAs are 100% owned by you.   

Here are a few tips to minimizing the tax hit. 

 

1.       Fill your tax buckets

In retirement, choosing how you time withdrawals from your accounts can save thousands of dollars in taxes.  The two commonly used methods, “one-at-a-time” and “proportionally”, have some benefits but may not be optimal. The one-at-a-time approach pushes the tax deferral benefit of your accounts out in time.  This would entail taking from brokerage accounts first, then tax-deferred and finally tax-fee accounts (like Roth IRAs).  However, this may not mean a lower total tax bill if you have large capital gains in your brokerage account or you are paying high tax rates during the years when you withdraw from tax-deferred accounts.  A more tax efficient strategy could be the Proportional method.  This way, you are pulling from all the accounts according to the size of the balance.  This evens out the tax bill, and could mean paying lower marginal rates; however, this method still may not minimize taxes.   Taking a more customized approach of consciously filling your taxable income buckets, and then ordering your brokerage and Roth accounts may lead to lower overall taxes. 

 

2.       Consider the timing of income

If you are between jobs for an extended time or in retirement, take advantage of low earning years by filling your marginal tax buckets.  Consider this as arbitraging future tax rates with current tax rates.  It may be smart if you can pull forward income and pay a low marginal tax today, versus an unknown future tax rate.  This may be in the form of withdrawing dollars from your tax-deferred accounts to pay for your expenses or to converting to a Roth IRA. (Roth conversions can be done at any age.)  To fill up the 12% marginal tax bucket, a married person with a mortgage and two kids can earn about $100,000.  If your income is less than that, check with your tax preparer and financial advisor about ways to pull income into that year.

3.       Capture losses

Just as the government owes some of your capital gains, they also share in your losses.  Take losses especially if you are offsetting gains.  If those are short term gains which are usually taxed at a higher rate, all the better.  Be sure not to trigger a “wash sale[1]”-- so either wait 31 days to re-purchase the security, or switch to a security that is not “substantially identical”.

 

Careful and thoughtful financial planning may influence the timing of some financial moves to significantly alter how much of your assets are truly yours and how much are the government’s. 

 

 

 [1] https://www.sec.gov/answers/wash.htm

 

 


Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.