Year-End Tax Planning

The Holiday Season is always a fast-paced time.  However, setting a few hours aside each December to review your projected tax liability and financial plan can help extend your holiday cheer into the New Year.

2017 Year-End Planning is once again dominated by the hope of Tax Reform. While the details of tax reform are still being debated, if we assume Tax Reform is enacted and all tax rates reduced in 2018 as compared to 2017, smart tax planning would entail taking all available deductions and losses in 2017 as one’s marginal tax rate is assumed higher in 2017 (than in 2018) making deductions more valuable this year (all else equal). Here are a few other ideas:

Maximize 401k Plan Contributions: For taxpayers under Age 50, a maximum of $18,000 can be contributed for 2017 and for those over Age 50, a maximum of $24,000 can be contributed. In some instances, it may be advantageous to defer 100% of your last few paychecks to reach the maximum deduction for the year. For those self-employed in New Jersey, consider establishing a 401K Profit Sharing Plan before year-end as a 401K Profit Sharing Plan offers greater tax benefits than SEP/SIMPLE/Traditional IRAs under the Federal & New Jersey Tax Code.

For NJ Seniors, Monitor your 2017 Income Levels: NJ Seniors should be careful to understand their annual income each year. This is important as future Medicare Premiums, the taxation of Social Security income, and the New Jersey taxation of pension/other retirement income will be driven by your reported income levels. Additionally, a Senior’s eligibility for certain property tax benefits like the NJ Senior Freeze and the Homestead Benefit are also determined based on annual income. Failure to stay within these defined income levels could result in a loss of valuable Federal & New Jersey tax benefits aimed at easing the tax burden of Seniors.

Capture Low Tax Brackets By Accelerating Income: For taxpayers who had unusually low earnings or high deductions in 2017, it may make sense to use your lower than normal tax brackets to sell highly appreciated stock, withdraw money from an IRA, or convert a Pre-Tax IRA into a Roth IRA before year-end. If properly executed, the taxpayer would recognize income earlier, but at a more favorable tax bracket than the taxpayer’s future tax bracket. Accelerating income is a powerful but often overlooked strategy.

Don’t Forget your RMDs: For Taxpayer over the Age of 70.5 or any taxpayer who has inherited a non-spousal IRA, it is important to remember to take your RMD before the end of the year (unless an exception applies) to avoid a 50% non-compliance penalty.

Match 529 Withdrawals to College Expenses Paid: Before year-end, verify that the amounts withdrawn from all 529 College Plans do not exceed the amount of qualified education expenses paid during the year.

Manage Fund Distributions & Investment Losses: The stock market has done well in recent years and many mutual funds will be distributing large taxable gains at year end. To avoid unexpected additional taxes in April, taxpayers should estimate and plan for these year-end capital gains. One strategy for those receiving sizable capital gains is to sell investments with losses before year-end to offset the 2017 gains.  Lastly, if tax rates are reduced in 2018 and beyond, recognizing losses in 2017 will result in a greater tax benefit on the loss due to the higher 2017 tax rate. 

Please Note: This Article is not intended to be Tax Advice. Tax Advice is always specific to each Taxpayer's unique financial circumstances. Please consult with your Tax Advisor.