More Money in Your Pocket!
By Jill Ciccarelli Rapps, CFP®
Your total return on your assets is not only the result of how much money you earn on your investments; your return is also impacted by the amount you keep after taxes. Unfortunately, tax efficiencies are often overlooked when considering how to best preserve and enhance your wealth. As we approach the end of 2017, start planning today to find opportunities to save money on your taxes!
Timing is everything. Compare your 2017 income to your projected income in 2018. If you anticipate that your 2017 income will be greater, you should defer income (i.e. year-end bonuses, collection of debts) to the following year; on the flip side, you may want to accelerate your income if your 2017 income will likely be less than your 2018 income. Likewise, you should use this comparison to determine if you should itemize deductions in 2017 or accelerate to next year (i.e. medical expenses, charitable gifts).
A word of caution: Amidst the Congressional discussion of tax reform, the amount you can claim for your standard deduction may increase in 2018, while other deductions may be eliminated. If the new tax plan does come to fruition, it could be beneficial to claim as many itemized deductions as possible in 2017, as certain itemized deductions may be useless in reducing your 2018 tax burden.
Hint: If you are charitably inclined, consider establishing a donor-advised fund (DAF) to accelerate your charitable giving. By creating a DAF, you have the flexibility to make varying yearly contributions to your fund based on your annual income.
For instance, if you have earned a significantly higher income in 2017, you could make a larger donation to your fund to offset your income. You will receive a charitable deduction for the full amount in 2017, but you have the flexibility to disperse assets to your favorite charities over the course of several years.
Don’t pay taxes on your IRA distributions. For those of you who are 70 ½ or older, another effective way to reduce your taxable income is to direct your required minimum distributions (RMDs) towards the charity of your choice. If you set up a direct link between your IRA and your preferred charity, your IRA distributions will not be reported as income on your tax return.
As an example, if you are in a 28% bracket and make the maximum annual contribution of $100,000 from your IRA, you may enjoy a savings of $28,000 in taxes; essentially, it only costs you $72,000 to make a $100,000 gift to your favorite charities.
A word of caution: All contributions must go directly to the charity by December 31.
Hint: This charitable giving technique could also save you money on your Medicare premiums and reduce other types of taxes like the 3.8% additional Medicare tax.
Take full advantage of the tax benefits available through retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans (such as 401(k) plans) allow you to contribute funds on a deductible or pre-tax basis. To fully leverage these tax-advantaged accounts, you should contribute the maximum annual amount.
For 2017, you may contribute:
♦ Up to $18,000 to a 401(k) plan (or $24,000 if you are age 50 or older); and
♦ Up to $5,500 to a traditional IRA (or $6,500 if you are age 50 and older).
Employer plans typically have a contribution deadline of December 31, whereas IRA contributions can be made until April 15, 2018.
Hint: For 401(k) plans, if you want to accelerate your tax deduction for 2017 by making the maximum annual contribution, ask your employer to defer a larger portion of your December income.
Review your investment portfolios now! Understand whether you have realized or unrealized gains or losses in 2017, and whether you have any carry-forward losses from prior years. If you have unrealized losses in your portfolio, you should consider the benefits of “tax harvesting” – that is, selling these positions to offset realized gains. For instance, if you have realized long-term losses of $20,000 and realized long-term gains of $20,000, you essentially have wiped out $4,000 of taxes (assuming the 20% long-term capital gains tax rate).
Word of caution: Long-term (held for more than 12 months) and short-term gains are treated differently. Make sure you to understand how each of these scenarios will impact your tax harvesting.
While these tips will likely have a positive impact on the amount of money in your pocket this year, there are many more strategies that can be implemented – especially if you are a high-income earner. Above all, you should meet with your financial advisor and CPA before the end of the year to determine the best plan for you to capitalize on tax relief opportunities.
Happy savings!
