Year-End Tax Tips & Strategies

As we approach the end of 2017, it’s important to be aware of some tax strategies that can be implemented. There are some strategies that can wait until your tax filing deadline, however, the following strategies must be implemented before year end.

Contributions to Tax-Qualified Accounts

If you’re currently contributing to an employer sponsored plan, such as a 401(k) or 403(b) plan, and want to maximize your annual contributions, it would be a good idea to double check that you are on track to do so before year end. The current employee contribution limit is $18,000, with an additional $6,000 “catch-up” permitted for those who are age 50 or over.

Please note for 2018, the employee contribution limit is increasing to $18,500. Additionally, the SEP IRA contribution limit will rise to $55,000 and the defined benefit plan contribution limit will rise to $220,000.

Roth Conversions

Depending on your current situation, a Roth conversion could be a great wealth enhancement strategy. With a Roth conversion, you pay the tax now, the conversion amount then grows tax free and gets distributed tax free as well.

Some key variables that we consider for determining suitability for a Roth conversion are current taxable income, projected future taxable income and resources available to pay the tax on the conversion. It can be a great deal if your marginal tax rate is expected to be higher in the future. Therefore, the best times for Roth conversions are typically once a client retires but before social security and required minimum distributions (RMD’s) start. Converting Traditional IRA assets to a Roth IRA can substantially increase terminal wealth due to the tax free growth, especially if you are younger. Thus, Roth IRA assets should be “last to withdraw” for taking distributions in most cases.

Here at WJ Interests, we can do a tax analysis to determine if Roth conversions are recommended. Additionally, it’s prudent to consider the Medicare surcharge income thresholds when considering a Roth conversion.

Please note due to the pending tax reform bills, it appears that you will no longer have the option to “re-characterize” a Roth IRA conversion; which essentially reverses the conversion amount back into your Traditional IRA. This strategy was usually considered when the current account value is now lower than it was at the time of conversion. October 15th of the following year was the deadline to re-characterize. If you have already completed a Roth conversion in 2017 and wish to re-characterize, it must happen before year end.

Qualified Charitable Distributions & Utilizing Donor Advised Funds

At age 70 ½, the IRS requires you to begin taking distributions from your IRA each year. This is called the Required Minimum Distribution (RMD), which is taxed as ordinary income. However, you may elect to donate up to $100,000 of your annual RMD to a public charity, which will satisfy your RMD and exclude the qualified charitable distribution (QDC) amount from your taxable income.

An additional tax-advantaged charitable opportunity to consider is contributing to a Donor Advised Fund (DAF). You receive an immediate tax deduction, which can be up to 50% of adjusted gross income (AGI) for gifts of cash and up to 30% of AGI for gifts of appreciated securities, mutual funds, real estate and other assets. There is a five-year carry-forward deduction on gifts that exceed AGI limits. If you have highly appreciated securities, they would be ideal to contribute to a DAF, you would be removing the potential capital gain from your portfolio in addition to receiving an immediate income tax deduction.

In addition to these tax strategies, there are other tax strategies available to utilize depending on your situation. A WJ advisor can help you determine which tax strategies are recommended for you.

In closing, we want to wish each of you a Merry Christmas and a Happy Holiday Season. We appreciate the confidence you have placed in us to help you reach all your financial goals and objectives.

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