1. Harvest year-end investment losses.
Determine positions in taxable investment accounts that have losses and see if you have gains that may be offset by those losses. This is ideally done when re-balancing your investment portfolio to your target asset allocation.
2. Maximize retirement plan contributions.
Determine the maximum amount that can be contributed to your retirement plan. Calculate what has been deposited year-to-date so that you can maximize current year contributions before year-end. This is the best remaining tax deduction because you are avoiding income tax on contributions made to your account. If you are in a combined 34% tax rate for federal and state purposes, this is a 34% return on your money the day you make a contribution. That is hard to beat!
3. Consider a Roth conversion.
If your income is likely to be higher in future years, it may make sense to convert IRA funds to a Roth IRA. If the current year income is unusually low, you will likely pay less tax on conversion and future growth will be tax free. Additionally, you may re-characterize or “undo” the Roth conversion until October 15th following the year of conversion and receive back all of the tax paid at conversion. This would make sense if the value of the converted funds substantially decreased in value.
Gifts of appreciated securities will avoid capital gains tax and allow for a charitable deduction for income tax purposes. Determine taxable income for the current year and compare to next year. Based on your tax rate in the respective years, plan contributions based on tax rate. Be sure to watch out for charitable contributions limitations.
5. Plan itemized deductions.
Review your current year income and compare to next year’s anticipated income. If your income is higher this year, itemized deductions will be more valuable this year. In that case, accelerate deductions into the current year when they will be worth more. Some deductions are subject to a floor based on income. These deductions can be worth more as well in low income years, or vice versa.
6. Watch mutual fund purchases & distributions.
Be careful when purchasing mutual funds late in the year. Over the course of the year, a mutual fund’s share price will typically increase commensurate with the interest, dividends and capital gains that are accruing within the fund’s investment portfolio. Near year-end, mutual funds will make distributions of those items and that will cause the fund’s share price to fall by the amount of the distributions. Purchasing a mutual fund just before such distributions can create a calamity by causing a tax liability on the distributions while the value of the investment has declined.
About the Author: Gene has over twenty-five years of experience helping people simplify their financial lives He is the creator of The Lifetime Financial Solution™, a unique process for identifying, managing and monitoring life and financial goals. Gene is a native of Aiken and has spent most of his career in Augusta building successful accounting, financial planning, investing, and risk management businesses. Gene is a 1985 graduate of Clemson University. He presently serves on the board of University Health Services, Inc. and chairs the Richmond County Hospital Authority. He is a past member of the Finance, Accounting and Legal Studies Board at Clemson University. He currently serves on the Finance Committee and chairs the Investment Committee for The Catholic Diocese of Savannah. Gene is a member of St. Mary On The Hill Catholic Church. He formerly chaired the Finance Committee at Aquinas High School, served on the Finance Committee of St. Mary’s Church, served as President of the Uptown Kiwanis Club and served on the Board of Directors for Ceritas Corporation.
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This blog post was prepared by Eugene F. McManus, CPA, CFP® of AP Wealth Management, LLC. This piece was republished on the Hull Barrett webpage with permission from AP Wealth Management for the purpose of assisting and informing clients, but does not represent legal advice. When making financial or legal decisions, it is always advisable to receive advice based on personal circumstances. If you have questions, please contact a lawyer and/or financial planner.