Disclosure: This article is for informational purposes only and is not intended as tax advice. Tax laws are complex and can vary by individual situation, so it’s essential to consult with a Certified Public Accountant (CPA) or qualified tax professional for advice tailored to your specific financial needs.
As the year comes to a close, many people are focused on holiday plans and upcoming resolutions — but it’s also the perfect time to review your tax strategy. With recent tax reforms like the Tax Cuts and Jobs Act, The SECURE Act, and The SECURE Act 2.0 bringing substantial changes, proactive tax planning is more important than ever.
A well-thought-out tax strategy doesn’t just ensure compliance; it can also help you retain more of what you’ve earned. Reviewing your financial picture now, especially if there have been significant changes this year, can help you identify ways to minimize your tax liability and make the most of tax-saving opportunities.
Here are some key considerations and strategies to discuss with your CPA as you wrap up the year.
Related: How to Analyze Your 1040 Return To Be More Tax Efficient
1. Evaluate Your Income Year-Over-Year
If this year’s income looks different from last year’s, consider adjusting your withholdings and estimated tax payments. This is particularly relevant for those who are newly retired and may need to make quarterly tax payments to avoid penalties.
Revised withholding tables might reduce the amount required to withhold. If you owe more this year, ensure you make additional quarterly payments to avoid underpayment penalties unless you meet “safe harbor” requirements. Additionally, consider paying state property taxes before year-end to claim a federal deduction.
2. Review Stock Account Transactions
Sold stock or rebalanced taxable accounts this year? Make sure to assess potential tax impacts. This includes inherited accounts, which transfer tax-free initially, but gains from subsequent sales will be taxed. To optimize, consider loss-harvesting strategies to offset taxable gains.
Related: Have You Considered Tax-Loss Harvesting?
3. Inheritances: Know the Tax Implications
While initial inheritances are often tax-free, any gains from subsequent sales will be taxed. Inherited IRAs, annuities, or retirement plans each have specific rules regarding required withdrawals, which may be taxed at the decedent’s highest rate. However, inherited Roth IRAs allow tax-free payouts based on life expectancy.
4. Real Estate Changes: Buying, Selling, or Refinancing
The profits from a sale of a principal residence are typically tax-free (up to $500,000 for a married couple), but there are some wrinkles, so make sure you qualify. In addition, if you paid off a mortgage on which you were deducting points year by year, you can deduct the remaining balance this year.
If you refinanced your mortgage, it may be possible to generate amortization of points.
5. Coordinate Charitable Donations with Your CPA
To confirm that you are taking advantage of all tax breaks available while simultaneously not incurring any penalties, make sure you see your CPA when considering charitable donations.
For example, consider donating appreciated securities instead of writing out a check. You can also save money by transferring a required minimum distribution (RMD) directly to a qualified charity, thus avoiding paying taxes on the withdrawal. (Note: You can make these direct transfers after age 701⁄2, but RMDs start at 72.) The result would be a reduction in your taxable income. (But also be aware that the donation maximum is $100,000, and you will not qualify for a charitable deduction when filing federal income taxes). All things considered, it is generally beneficial to make the contribution directly to the charity, rather than take the deduction.
Related: How to Get Tax Savings on Charitable Contributions
6. Changes for Newlyweds, Widows, and Divorced Individuals
Has there been a marriage, death or divorce? Marital status changes affect your tax planning.
If you got married this year, you should consider how tax rates can increase for a two-earner couple or decrease for a single- earner couple. In addition, if one spouse of a newly married couple is jobless, the unemployed spouse may be able to fund an IRA (despite his unemployed status) if the other spouse is working.
Beginning in 2019, alimony is no longer deductible for the payor nor treated as income for the recipient. Divorce settlements need to reflect this. Also make sure you review who is able to deduct the dependents.
If you have been widowed this year, you can still file jointly for this year (next year you are required to file “single”), but you need to consider possible decreases in income and potential decreases in estimated tax payments. While filing jointly can increase the deductions you are entitled to, make sure to watch out for any possible negative repercussions. You should also review all sources of income with your financial professional to ensure that you get what you are entitled to from the estate and that you understand the distribution rules.
7. Tax Benefits for Parents of College Students and Recent Grads
The American Opportunity Tax Credit gives parents of college students a tax break worth up to $2,500 of tuition per eligible student for the first four years of college.
Recent mid-year grads (or anyone who will not work more than 245 days this year) can request their employer use a part-year method to pay them, which will result in employers’ withholding less money, leaving more for you.
8. Newly Retired? Strategize Your Tax Bracket
Discuss tax bracket management with your CPA, so that you are remaining within (and using up as much of) your current tax bracket as possible, whether that is the 10% tax bracket or a higher tax bracket. These strategies could include maxing out on pretax retirement accounts, and also taking withdrawals from qualified accounts so that you are converting pretax dollars to after-tax dollars, potentially at a lower rate.
However, if you need more income, you should consider doing one or more of the following:
- Withdrawing cash (tax-free) through loans on a universal life insurance policy (although this will deplete the policy’s value),
- Taking out a home equity line of credit (although interest is no longer deductible), or
- Deferring Social Security benefits to reduce long-term tax costs.
9. Consider How Recent Tax Laws Could Impact You
The 2017 tax reform brought significant changes, particularly by doubling the standard deduction, which might affect how you maximize deductions. The SECURE Act introduced further adjustments, especially for retirement savings, as it acknowledged longer life expectancies and retirement readiness issues for many Americans.
In summary, recent tax legislation may not have simplified things, but it has opened up many planning opportunities. A proactive approach to year-end tax planning can help you take advantage of these opportunities and minimize your tax liability.
As tax laws continue to evolve, a thoughtful approach to year-end planning is essential to make the most of available opportunities and safeguard your financial future. Whether you’ve experienced significant life changes this year, made investment moves, or just want to ensure you’re optimizing your tax strategy, now is the time to review your options.
Our team of financial advisors is here to guide you through these complex considerations. Schedule a call with us to discuss how proactive tax planning can support your financial goals, streamline your tax obligations, and enhance your peace of mind.
Debra Taylor, CPA/PFS, JD, CDFA, writes on tax and retirement planning for Horsesmouth.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.