SageVest Wealth Management works proactively throughout the year to advise clients how taxes may impact your wealth strategies and broader financial considerations. As the year draws to a close, we focus our attention on year-end tax planning, with a reminder that some tax strategies have recently changed as a result of tax reforms.
Please contact us before December 10 to discuss any of the opportunities below. This allows adequate time for planning and implementation of appropriate tax-planning strategies.
1. Contributions To Retirement Plans
Making pre-tax contributions to your company retirement plan, self-employed retirement account, or IRA is one of the best and easiest ways to reduce your taxable income, while also saving for your future.
• If your company plan offers a matching feature, your contributions can generate an immediate return on investment. Please note that you might need to spread contributions throughout the year to qualify for maximum matching program benefits.
• If you’re self-employed and might benefit from a solo 401(k), please be aware that you must open a solo 401(k) plan before year-end.
• If you’re 50+, you must make a formal payroll election to take advantage of catch-up contribution options available to you.
Traditional contribution limits for 2019 and 2020 are as follows:
| Plan Type | Contribution Limits [1] 2019 | Contribution Limits [1] 2020 |
|---|---|---|
| 401(k)[2], 403(b), TSP Elective Deferrals | $19,000 | $19,500 |
| - Age 50+ Catch-up | $6,000 | $6,500 |
| Solo 401(k) & SEP IRA Plans | $56,000 | $57,000 |
| Simple Elective Deferrals | $13,000 | $13,500 |
| - Age 50+ Catch-up | $3,000 | $3,000 |
| Traditional & Roth IRAs [2] | $6,000 | $6,000 |
| - Age 50+ Catch-up | $1,000 | $1,000 |
[1] Subject to income limitations.
[2] Note that contributions to Roth accounts do not reduce your current year taxable income. However, all future earnings and withdrawals are exempt from taxation.
Contact us with your questions, or if you’re self-employed.
2. Required Minimum Distributions (RMD)
If you’re 70 ½ or older, Required Minimum Distributions (RMDs) must be taken from eligible retirement accounts or inherited IRAs by December 31.
• If you turned 70 ½ in 2019, you may be able to defer your first RMD. Contact us to discuss whether this election is right for you.
• With recent increases to the standard deduction, you may prefer to donate some, or all, of your RMD as a charitable gift. (Please read the following section.)
3. Charitable Contributions
Charitable contributions can help reduce your taxable income. However, the traditional manner of charitable giving might not aid your tax objectives as they once did as a result of new higher standard deduction amounts. We offer the following considerations on charitable giving:
• Outright Charitable Gifts: You can always make outright gifts to charitable organizations of your choice. However,
contributing appreciated securities (versus cash) might allow you to receive a tax deduction while simultaneously avoiding a future capital gain tax liability. The charitable organization gets the same financial benefit, and it doesn’t owe taxes if the organization is tax-exempt. We encourage individuals to replenish their investments with cash to help stay invested, as appropriate.
• Charitable Gift Funds: If your planned contribution amount will not generate an additional itemized deduction benefit, due to higher standard deduction amounts, you might want to consider aggregating two or more years of giving into a charitable gift fund. Such aggregation might allow you to benefit from charitable deductions in selected years, versus otherwise foregoing deduction benefits.
• Charitable Giving: If you’re 70 ½ or older, the best technique for charitable giving might be to gift a portion of your RMD as a Qualified Charitable Distribution (QCD). You may donate up to $100,000 per person, per year, directly from your IRA. QCDs count towards your RMD, yet are excluded from your income, helping to reduce your taxable income, regardless of whether you itemize or not.
Contact us for assistance with any of these gifting strategies, including selecting which strategy best aligns your charitable and financial goals.
4. Capital Gains
Realizing investment losses and minimizing capital gains can help to reduce your tax liability. SageVest Wealth Management reviews capital gains and losses on an annual basis for all clients. We encourage you to do the same across any personally managed accounts, and to apprise us and your accountant of any such gains or losses.
• Please note that if you sell an investment at a loss, you can’t re-purchase the same or any “substantially identical” investment for 30 days, or you will trigger a wash sale which forfeits the tax loss.
5. Appropriate Tax Payments
We recommend consulting with your tax preparer before year-end to evaluate if your taxes are potentially over- or under-paid, and if additional tax payments might be necessary. If additional payments are anticipated, it’s best to know your financial standing to ensure you have adequate cash reserves and to avoid any potential underpayment penalties.
Careful tax planning is recommended for anyone who:
• Has experienced a change in income.
• Is filing under a new status (married, single, head of household).
• May be losing itemized deductions.
• Traditionally makes estimated tax payments.
6. Health Spending
If you’ve had significant medical expenses, make sure you’re keeping all necessary accountings for possible itemized deduction benefits. As a reminder, you can now only deduct qualified medical expenses that exceed 10% of your adjusted gross income (AGI).
7. Health Funding
Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) allow you to pay medical expenses with pre-tax dollars. However, while unused dollars in HSA accounts can accumulate, most FSAs operate on a “use it or lose it” basis.
• Check with your employer. Some FSAs allow a small carryover. If yours doesn’t, you’ll need to use up any FSA balance before year-end.
• You may also have to make elections for next year before year-end.
8. College Funding
If college savings is an objective for you, your family or friends, consider making contributions to a college savings plan. College Section 529 plans offer tax-deferred savings, elevated annual gifting limits, and state tax deduction benefits in many states.
9. Business Planning
As a business owner, it’s important to maximize year-end tax planning opportunities, e.g., timing of large expenses or personal compensation considerations. You might also stand to benefit from the new 20% qualified business income deduction available to some business entities. SageVest is available to assist in a collaborative role, but we strongly recommend that you coordinate with your tax preparer regarding specific planning opportunities.
As a reminder, establishing a company or self-employed retirement plan before year-end can dramatically reduce your taxable income. Contact us for assistance.
10. Roth IRA Conversions
While a Roth IRA conversion generates taxable income, you might be able to benefit from a Roth conversion with little to no tax liability if your income was lower this year, or if you’re expecting a business loss for the current year. The amount converted to a Roth IRA remains tax-free for your lifetime.
• As a reminder, Roth IRA conversions are now non-reversible, meaning advance financial and tax planning are essential.
11. Family Gifting
Effective gift planning can help you to support family and friends, while also maximizing tax advantages for yourself.
• For 2019 and 2020, you can transfer up to $15,000 per person without triggering gift tax or taxable reporting requirements.
• Larger gifting transfers require more advanced strategies and broader consideration. Please contact us to discuss.
• Section 529 college savings plans offer tax-advantaged savings (see above).
Remember that your gifting considerations should always be planned, recognizing both your own financial security and broader giving objectives.
12. Trust Income & Distributions
If you’re the trustee or beneficiary of a trust, review net trust income and distribution elections before year-end. While some elections to beneficiaries can defer into the early part of the next calendar year, it’s best to be prepared, especially as trusts reach the top Federal tax bracket at a very low taxable income threshold of $12,750.
Please contact us to discuss any of these tax-planning or broader financial planning considerations.
