The IIAR and ARF reserve investment funds are currently managed by Stifel Financial Services under the investment policy established by their respective board of directors. In this and subsequent issues of the Condenser, you’ll find a “financial tech tips” article from the firm on this page. Members of IIAR may use the financial services of Stifel for personal and business investments and take advantage of the reduced rate structure offered with IIAR membership.

If you are not engaging in year-end tax planning, you could be leaving money on the table. Consider the following strategies to identify potential opportunities to lower your 2018 (or 2019) tax bill. Be sure to consult with your a qualified tax professional before implementation.

TAX GAIN/LOSS HARVESTING

Toward the end of the year, review your taxable investment accounts with your financial advisor to determine whether year-to-date sales and purchases result in a capital gain or capital loss. If faced with a gain, consider harvesting unrealized losses. Alternatively, if faced with a loss, consider harvesting unrealized gains. The ability to offset capital gains can be a valuable tool if implemented as part of a holistic tax planning strategy that considers all available tax information, including additional sources of taxable income (or losses) and capital loss carryforward available from the previous tax year.

REQUIRED MINIMUM DISTRIBUTIONS (RMDS)

Although RMDs must generally begin by April 1 of the year following the year in which the account owner reaches age 70 ½, the first distribution calendar year is the year in which the account owner reaches age 70 ½. Thus, if you reach age 70 ½ in 2018, you can delay the first required distribution until 2019. However, if you do this, you will have to take a double distribution in 2019 (i.e., the amount required for 2018 plus the amount required for 2019). Failure to take an RMD can result in a penalty of 50% of the RMD amount not withdrawn.

If faced with RMDs, consider a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your IRA to a qualified charity. Generally, RMDs are considered taxable income. However, your RMD is excluded from income to the extent the QCD strategy is utilized. For example, if your RMD for the year is $10,000 and you make a $7,000 QCD, only $3,000 of your RMD will be taxed.

POSTPONEMENT OF INCOME AND ACCELERATION OF DEDUCTIONS

Some taxpayers may benefit from postponing income. This strategy may allow those taxpayers to claim deductions, credits, and other tax breaks for 2018 that otherwise may have been phased out if adjusted gross income (AGI) were allowed to exceed certain thresholds. These benefits include child tax credits, higher education tax credits, and deductions for student loan interest. Those taxpayers who anticipate being in a lower tax bracket in 2019 may also benefit from postponing income.

Conversely, some taxpayers may benefit from accelerating income into the current tax year. This strategy could be particularly useful for taxpayers whose 2018 marginal tax rate will be lower than their 2019 marginal tax rate. Additionally, by reducing income for the upcoming tax year, taxpayers may be able to take advantage of additional deductions and/or credits.

Below are some examples of how you may be able to shift income/expenses between tax years:

Talk to your employer about deferring your 2018 bonus until early 2019.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you do not pay your credit card bill until after the end of the year.

Apply a bunching strategy to medical expenses. These expenses are only deductible to the extent they exceed 7.5% of your 2018 AGI.

Consider making charitable gifts. Rather than gifting cash, donate appreciated stock that you have held for more than one year. Take it to the next level by using an advanced charitable giving strategy such as a donor-advised fund, charitable remainder trust, or QCD.

CAUTION:

The standard deduction amount was nearly doubled by the tax reform bill signed into law by President Trump on December 22, 2017. As a result, many taxpayers who itemized their deductions in 2017 will no longer itemize their deductions in 2018. Be careful not to waste your time postponing or accelerating itemized deductions if you will be taking the standard deduction on your next return. For help determining whether you should anticipate itemizing your deductions, speak with your Stifel Financial  Advisor and a qualified tax professional.

Additional information is also available in a recent Stifel article entitled, “To Itemize, or Not to Itemize? That Is the Question.”

Implement Roth Conversion Strategies

There are a number of benefits for those who convert traditional IRA funds into Roth IRA funds, including:

Tax-free growth.

Roth IRAs are funded with after-tax dollars. Generally, when distributions are taken from a Roth IRA, there is no tax due on the original contributions or any subsequent growth.

No RMDs.

Unlike traditional IRAs, Roth IRAs are not subject to RMDs.

Reduced traditional IRA RMDs.

Converting funds from a traditional IRA to a Roth IRA reduces the traditional IRA balance, which, in turn, reduces the size of RMDs the traditional IRA owner will eventually be forced to take.

CAUTION:

The amount of the conversion will be considered taxable income just like any other distribution from a traditional IRA. Under previous tax law, taxpayers were allowed to undo or “recharacterize” Roth conversions. Under the current tax law, however, recharacterization is no longer permitted. Any conversion of funds from a traditional IRA to a Roth IRA is final. For this reason, you may consider delaying Roth conversions until the end of the tax year when total taxable income is more easily projected.

Utilize Annual Exclusion Gifts

In 2018, every individual has the ability to make $15,000 gifts to an unlimited number of recipients without any estate or gift tax consequences. You cannot carry over unused annual exclusion gifts from one year to the next. In addition to the estate and gift tax benefits, annual exclusion gifts may save families income taxes when income-producing property is given to family members who are in lower income tax brackets and are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to reduce your income tax burden. Please contact your financial advisor if you have additional questions about one of the strategies discussed above.

The IIAR and ARF reserve investment funds are currently managed by Stifel Financial Services under the investment policy established by their respective board of directors. Members of IIAR may use the services of Stifel for personal and business investments and take advantage of the reduced rate structure offered with IIAR membership. For additional wealth planning assistance, contact your Stifel representative: Jeff Howard or Jim Lenaghan at (251) 340-5044.

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Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.