Some thoughts on year end tax planning

Since tax changes are in the air (maybe), let me inject some reality with suggestion for year tax planning based on existing law and with the probability of no substantive changes occurring that will affect 2017 taxes.

  • All planning starts with a projection. Prepare one now to see where you stand
  • If you are eligible for traditional or Roth IRA contributions, consider making the contribution sooner rather than later to start the tax-deferred or tax-free income stream
  • If you have a business or receive income subject to self-employment tax, consider opening a 401k or Keogh account on or before December 31, 2017. Note you can delay opening a SEP as late as the due date (including extensions) for your 2017 tax return. Contributions to all three plans do not have to be made until sometime in 2018 (check with your tax advisor for the dates)
  • Accelerate as many deductions as possible to get the benefit this year rather than next year. One effective way is to donate appreciated stock to a donor-advised fund (DAF). You will get a deduction for the full value of the stock and not have to recognize the income. You can then time the payment to your favorite charities by recommending that the DAF make the contributions in 2018 or later
  • If you own stock with losses, you can sell them to realize the loss. If you buy them back within 30 days (before or after the sale), you will have a “wash sale” and cannot deduct the loss. A suggestion is to sell and then immediately buy an ETF that is similar to the stocks you sold. This will provide a comparable market risk. After the 30-day period, you can reverse the transactions. An example is to sell individual healthcare stocks, and buy a healthcare ETF
  • If you have realized short-term gains, try to sell stocks with losses to shelter them. The best is to sell stock with long term losses. This will net out and these losses won’t offset long term gains in a later year
  • If you own mutual funds that will declare year-end capital gain dividends in December without making an offsetting distribution, consider selling them now!
  • If you will be subject to the Alternative Minimum Tax don’t pay any more state income or real estate taxes which will not give you a benefit; instead make the payment the beginning of January if possible. If you cannot avoid the AMT, consider accelerating income that will be taxed at the lower AMT bracket such as cashing in long held U.S. Savings Bonds, accelerating the receipt of income you normally would receive in January, taking a distribution from your IRA or converting all or part of your IRA to a Roth IRA
  • If you want to pass some wealth to others that will be subject someday to estate taxes if retained by you, tax-free gifts of $14,000 per person can be made up until December 31. The $14,000 is doubled if you have a consenting spouse. There is no income tax benefit to this, but it will remove this money and any future earnings and appreciation from your eventual estate
  • If you were required to make estimated tax payments and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax. If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days designating it as a tax-free rollover. Note that such distributions can only be done once in a 365 day period
  • If you suffered a large business loss in 2017 consider accelerating income that would be sheltered by the loss such as a distribution from an IRA, 401k or pension account

The above are suggestions you can consider. Note that none of the proposed tax changes would cause a change in any of the above moves. However, before you do anything, meet with your tax advisor to make sure the planning is effective for your situation.

Have questions? I’m here to help.