The holiday season is a time for good cheer, family and friends, celebration of the present (and presents) and reflecting on the past year. With your requests to Santa out of the way, it’s good to look at another important list: our year-end planning checklist. Take some time between the eggnog and champagne to go over these items.
- Financial goals. Did you meet your financial goals for 2018? Do these goals need to be changed or updated? Review your investments to help ensure you are meeting your financial goals.
- Year-end review. Did you have any life changes during the year that need to be addressed? This would include selling, transferring, and/or purchasing a major financial asset; a change in marital status; an addition to your family; or receiving a gift or inheritance.
- Tax changes. The recent Tax Cuts and Jobs Act represents the most sweeping changes to the tax code in decades. While you may benefit from the lower tax-rate structure, many tax preference items, such as deductions, were scaled back or eliminated altogether. You should consult with a tax professional to understand how the new law impacts your tax filing and if there are any strategies to consider based on individual circumstances. For example, a first step is determining your marginal income tax rate for 2018 based on the new brackets to see if strategies to increase, reduce, or defer income before the end of the year make sense. Based on drastic reductions in deductions for many taxpayers, those who have always itemized deductions may opt for the increased standard deduction instead.
- Finding an accountant. If you need an accountant or are thinking of changing accountants, now is the time to search for a new one. When choosing an accountant, consider these questions: What degrees or licenses does the accountant have? How many years has the accountant been in the business? What fees will be charged? Is the accountant’s expertise relevant to you? Who will prepare your return? Will the accountant represent you if you are audited?
- Tax gain/loss harvesting. Higher capital gains tax rates make buy-and-hold strategies more attractive; the higher the tax rate, the more valuable the strategy. Similarly, it becomes more important to harvest tax losses to shelter gains that would otherwise be taxed at the higher rate. Consult with your accountant on how to structure tax losses to offset gains for the year.
- Year-end income planning. Examine any remaining income that can be deferred from one taxable year to the following year. Oftentimes, year-end bonuses and discretionary investment income can be shifted one year to the next. On the flip side, prepaying property taxes, medical bills, or estimated state taxes, if you’re able, can give you added deductions to further reduce your taxable income.
- Max out your 401(k)/IRA contributions, including any catch-up contributions. You have until April 17, 2019, to fund your IRA for 2018. If you have an employer-sponsored retirement account, you should review where your money is invested and make changes to this account. Consult your investment advisor/tax accountant for any help. If you left a job and your 401(k) behind, take the time to consolidate accounts. For 2018, you can contribute $5,500 to a traditional IRA, plus a $1,000 catchup contribution if you are 50 or older. For a 401(k), you can contribute up to $18,000, plus a $6,000 catchup contribution if you are 50 or older.
- Taking Required Minimum Distributions? If you are reaching the age of 70½, you must begin to take Required Minimum Distributions from traditional IRAs and 401(k)s. It is advisable to come up with a strategy on how best to take these distributions. If you inherited any type of retirement account, check if you need to take a Required Minimum Distribution. If so, whose life is it based on: yours or the decedents?
- Research charitable contributions. If you are considering making any year-end charitable contributions, you may want to do the research now. A near-doubling of the standard deduction, coupled with reductions in many popular deductions (state and local taxes for example), means that less than 10% of taxpayers will likely itemize in 2018. This has profound implications for making charitable gifts. For taxpayers who are planning on claiming the standard deduction in 2018, there are two strategies to consider. For those age 70½ or older, distributing funds from an IRA tax-free directly to a qualified charity (up to $100,000 per IRA owner and can include RMDs) may be a good option. Another strategy is the concept of “lumping” multiple years of charitable gifts into one year in order to itemize deductions on that year’s tax return. For example, instead of a couple gifting $10,000 annually to a charity, they may consider gifting $30,000 in one year, representing three years’ worth of gifts. The couple could benefit from itemizing deductions that tax year and claim the higher standard deduction the next two years.
- Cash gifts and taxes. If you can afford to be generous, in 2018 you can give up to $15,000 each to any number of individuals with no gift tax or reporting requirements. Also, there is no tax for the recipient. Unused portions can’t be carried over to the next year. Individuals can make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider.
- Check on all beneficiaries on life insurance policies and retirement accounts to make sure these are accurate. These types of investment accounts pass to the beneficiary when the owner dies, despite what the will may state.
- Check on flexible spending accounts. If you have any type of flexible spending accounts, check to see how much money is left in them to make sure it is used it up before the year’s end.
- Look into 529 accounts. A grandparent–owned 529 account, which is free of federal income taxes until the money is withdrawn, is not reported on the Federal Student Aid (FASFA) form. Thus, it does not affect the grandchild’s financial-aid eligibility. However, once it is distributed, it is considered the grandchild’s income and may affect how much the grandchild will receive. Grandparents can also open IRAs for their grandchildren. They can contribute up to 100% of the grandchild’s earned income into the account. Check with your account and financial advisor for the best way to set these up. For more on this, look at our blog post “College Credit: 529 and Coverdell Educational Accounts.”
https://bowenasset.com/college-credit-529-and-coverdell-educational-accounts/
- Review financial and investment documents. It is easy to get into the habit of keeping every financial or investment document forever, just in case. But if your New Year’s resolution is to get your financial house in order, our blog post “How Long to Keep Important Financial Papers” has suggestions about retaining financial and investment documents.
https://bowenasset.com/how-long-to-keep-important-financial-papers/
Best wishes to you and yours for 2019 from all of us at Bowen Asset Management!
*Disclaimer
While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.