Tax Reform, Market Volatility and Year-End Planning
By: Cameron Diehl, CFP®
Friends – The election is behind us, market volatility has carried into the holiday season and following recent tax reform, year-end planning is more important than ever.
With all that in mind, I wanted to again share some reminders that may help you save on taxes come April. Some of these are evergreen and others are specific to 2018 given current markets and recent tax law changes.
- Planning in multi-year increments– Given the added complexity from recent reform, tax planning is no longer something that can be done in isolation each year. Planning should now take a longer-term perspective and be thoughtfully coordinated over multiple tax years to ensure you’re taking full advantage of various opportunities.
- “Bunch” deductions– The tax law nearly doubled the standard income tax deduction for 2018 while eliminating or reducing a number of other deductions. This will significantly decrease the number of filers who will itemize their taxes. One strategy that can help is timing multiple years’ worth of deductions into a single year to itemize one year while taking advantage of the increased standard deduction in another. Opportunities for this could include accelerating mortgage interest payments, property taxes, discretionary medical expenses, charitable gifts, etc.
- Charitable giving – Charitable giving may be the biggest application for bunching. Donor-advised funds offer a simple solution where you can make multiple years’ worth of gifts at once, receive a deduction for the full amount and distribute donations to recipients of your choosing at a future date. As always, be sure to complete any planned charitable gifts before year end and consider giving appreciated securities instead of cash to avoid capital gains taxes, make a larger donation and potentially receive a larger deduction.
- Reassess and rebalance your portfolio – Strong market performance over recent years and the subsequent pullback over the past couple months may have taken your portfolio off track. Rebalancing regularly to stay in line with your target allocations and reassessing the appropriateness of those targets is important and market pullbacks can provide an ideal opportunity to do so more tax efficiently –either through buying and selling or putting additional cash to work while markets are lower.
- Harvest losses – Especially important this year, consider harvesting any losses in your portfolio to offset gains and take up to a $3,000 deduction. Additionally, review your portfolio’s overall tax efficiency, including total turnover, capital gain distributions from mutual funds, etc.
- Revisit Roth conversion opportunities – If you’ve considered converting to a Roth IRA for any number of reasons, doing so at depreciated levels during a market pullback may prove advantageous. This decision can have complicated tax implications, so be sure to seek qualified advice before doing so.
- Take advantage of your Health Savings Accounts (HSAs) – HSAs remain one of the most tax-efficient ways to save, invest or even just boost your emergency fund. If you’re eligible to contribute and haven’t already, I highly recommend you consider doing so before the end of the year. You can read more about HSAs in one of my previous blog posts.
- Contribute to 401(k)s, IRAs and other retirement accounts – As always, maximizing pre-tax contributions to these accounts can reduce your taxable income and give your retirement savings a boost (up to $18,500 for 401(k)s and $5,500 for IRAs in 2018 with catch up options for anyone over 50). These limits are rising in 2019 – more on that in a future post.
- Take required minimum distributions (RMDs) – If applicable, don’t forget to take required distributions from retirement accounts to avoid up to a 50% penalty on undistributed amounts.
- Understand changes for businesses – The impact of tax reform on businesses was significant and beyond the scope of this blog. If you are a business owner, be sure to reach out and make sure you understand the impact to your business and any steps you should take as a result.
As always, if you would like to discuss anything covered above, please don’t hesitate to call or email me. I’m always happy to help.
Disclosure: Contributions to a Donor Advised Fund are irrevocable. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. RMD's are generally subject to federal income tax and may be subject to state taxes. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
