Marc A. Hebert's Money Sense: Consider year-end tax moves that could pay off next AprilBy MARC A. HEBERT
November 10. 2017 6:51PM
As it is getting nearer to year's end, now is a good time to review some potential tax moves to help minimize the effect that your income taxes will have on your finances come April 15 of next year.
Make time to plan. A review of the prior year's tax return and a reasonable estimate of how the current year's numbers might change is a good place to start. It is an appropriate time to look forward to 2018 as well. There might be an opportunity for tax savings if you are going to be in a lower tax bracket in one year versus the previous.
Defer income to next year. If, after review, you find that next year's income is much lower than this year's income, consider your ability to defer income items to next year. The reverse also applies - if this year's income is the lower of the two, try to move more income into the current year. Examples include the collection of business income and rents, or taking your bonus sooner or later.
Accelerate deductions. If you find that you need deductions for this year to reduce your higher income or are close to the standard deduction, you might want to accelerate your deductions into the current year. As examples, you might pay your elective medical expenses, real estate taxes (assuming your town accepts this), and state income tax estimates before year-end.
Any Alternative Minimum Tax (AMT)? While looking at your taxes, consider the effect the AMT might have on the situation. The actions you take to minimize your regular taxes might just generate more taxes under the AMT system. It also makes sense to review your AMT for 2017 and looking forward to 2018.
Are you withholding enough? If you find that you are going to owe a considerable amount of taxes or have underpaid any estimated tax, putting you in a penalty situation, then you might consider asking your employer to raise the amount of tax being withheld from now until the end of the year. The biggest advantage to doing so is that the withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck.
Maximize your retirement savings. Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan serve a dual purpose - they reduce your income taxes and increase your retirement nest egg.
Take your required minimum distributions (RMDs). Usually, you must start receiving a minimum distribution amount from your IRA and employer-sponsored retirement plan once you turn age 70½. If you don't take the required amount, the penalty is substantial - 50 percent of the amount you should have taken but didn't do so. At age 70½, you might also consider directly transferring up to $100,000 of funds from your IRA to a qualified charity. You aren't allowed a tax deduction for these transfers, but you don't have to include the income either.
Consider your investment income. While we are not suggesting that taxes drive your investment decisions, it is worth reviewing your portfolio for year-end tax moves. Perhaps there is an investment that is losing money that you were going to sell anyway - now might be the time to take the loss. Be sure to check for capital loss carryovers from the prior year.
Decide if you need help. As can be seen, there is a lot to think about when doing tax planning. A tax professional can help you evaluate your situation and determine the year-end tax moves that make the most sense for you.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at firstname.lastname@example.org. Your question and his response might appear in a future column.