Five Year-End Tax Planning Strategies

Close-up of unrecognizable woman working with tax return form: she checking papers and using calculator

Five Year-End Tax Planning Strategies

 Adam Rudolph, CFP®, Associate Wealth Advisor

December 17, 2019

Shorter days, colder temperatures, and holiday shopping in full swing all remind us that the end of the year is here. At Strategic Wealth Partners, we hope to provide the best type of present that can’t be wrapped in a bow; ways to take advantage of valuable tax benefits. Below are some of the most common tax planning strategies that may be beneficial as we approach year-end. While this post can serve as a helpful guide, you should consult a tax advisor about your unique situation before making any decisions.

1. Tax Bracket Management

Are you in a lower tax bracket this year than you will be in the future? If so, consider converting some or all of a Traditional IRA to a Roth IRA. Roth conversions are taxed as ordinary income tax in the year of the conversion. A Roth conversion can be a great tool if you are currently in a low tax bracket and can still recognize more taxable income before moving into the next tier. Benefits of a Roth conversion include:

  • The converted funds grow tax-free.
  • Total taxable income may be lower in retirement because distributions from a Roth IRA are generally not subject to income tax.
  • Roth IRAs are not subject to required minimum distributions (RMDs).
  • Roth IRAs are a great wealth transfer vehicle because, while distributions are required for non-spouse beneficiaries, the proceeds are not taxable.

Keep in mind that Roth IRAs are meant to be long-term in nature, and there could be taxes and penalties if funds are withdrawn within five years of the contribution or before age 59½.

2. Employee Benefit Plan Contributions

Do you have the ability to add additional savings to an employer-sponsored plan? If so, consider contributing additional funds to any of your employer-sponsored plans, including:

  • 401(k), 403(b), or similar plans – Consider using the last month of the year to review your total contributions to your retirement plan. The maximum contribution to a 401(k) in 2019 is $19,000 ($25,000 for individuals age 50 and older).
  • Health Savings Account (HSA) – If your employer offers a High Deductible Health Plan, you may want to consider funding an HSA. These accounts allow you to make pre-tax contributions up to $3,500 for an individual, and $7,000 for families, plus an additional $1,000 for individuals over age 55. Not only is your taxable income reduced by the amount of your contribution, the account also grows tax-free, and you can withdraw the funds tax-free for medical expenses. An HSA can also be treated similar to an IRA and effectively create greater retirement savings opportunities.

3. 529 Contributions

Do you have children or grandchildren planning for college? If so, consider contributing to a 529 college savings plan. The contributions grow tax-free, and funds can also be withdrawn tax-free when they are used for qualified education expenses. Illinois residents can deduct up to $10,000 ($20,000 for joint filers) per year from their state taxes to Illinois-sponsored 529 plans. For more information about 529 plans, please see my colleague Mark Weil’s post regarding frequently asked questions here.

4. Reducing and Deferring Capital Gains

Have you realized significant capital gains this year? If so, below are a couple of strategies to consider:

  • Tax-loss harvesting – Though no one wants to see their investments lose money, you can make lemonade out of lemons. If you sell an investment at a loss, you can use the loss to offset taxable gains that may have been generated by other investments or to offset ordinary income up to $3,000 per year. Any unused losses can be carried forward to future years. Even if an investment shows an overall gain, there may be individual tax lots at a loss. This frequently happens with mutual funds or similar investments where you may have added to the position over time. Of course, taxes should never be the driving force behind an investment decision, so make sure you consider your options carefully.
  • Capital gain distributions – Throughout the year, mutual funds sell assets and realize capital gains, which are then passed on to their investors (typically near year-end) as taxable income. By reviewing the expected distribution ahead of time (funds tend to publish estimates on their websites by early December), you can decide if you’d rather sell the fund before the distribution date.

5. Annual Exclusion Gifting

Do you make annual gifts to family members or others? If so, make sure to do so before year-end. Each individual is allowed to gift a maximum of $15,000 to any recipient without tapping into their lifetime gift tax exemption. This means a married couple could gift $30,000 to each of their children each year. For people with taxable estates, annual exclusion gifts are a powerful wealth transfer strategy.

*** One popular year-end tax planning strategy that I did not cover is charitable gifting. Given the complexity of the subject, I could not do it justice in such a short space. However, my colleague recently wrote a piece about this subject, including a discussion of three of the most common forms of charitable gifting:

  • Making Qualified Charitable Distributions from an IRA (to avoid paying income taxes on required minimum distributions).
  • Gifting appreciated securities (to avoid realizing large capital gains).
  • Establishing or adding to a Donor Advised Fund, possibly with appreciated securities (to receive a charitable tax deduction in the year of the contribution, while distributing the assets to charity over time).

If you would like to learn more, you can read here.

Before starting your holiday shopping, taking a few minutes to consider if any of these strategies is appropriate for you is the best gift you can give yourself this year. Please reach out to us if you would like to discuss these strategies further or if we can help you take advantage of potential tax savings.

Disclosure:

This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass.

Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (http://www.adviserinfo.sec.gov).

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