Year-End Tax Strategies

As Seen in the Fort Bend Independent

As we continue to approach the end of 2016, 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.

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 distribution s (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.

You have the option to “recharacterize” a Roth IRA conversion; which essentially reverses the conversion amount back into your Traditional IRA. This should be considered when the current account value is now lower than it was at the time of conversion. October 15th of the following year is the deadline to recharacterize. For substantial Roth IRA conversion amounts, consider opening a Roth IRA for each position to more effectively re-characterize if need be.

Tax Loss Harvesting

An additional strategy worth mentioning is tax loss harvesting, which involves deliberately selling the funds with the largest capital loss in a brokerage account, then buying back into a similar fund to avoid violating the “wash sale rule”, which prohibits buying back into the same fund within 30 days. The buying back step is very important to maintain market exposure. This strategy affords the opportunity to offset large future capital gains and/or take up to a $3,000 capital loss annually on your tax return. Tax loss harvesting can be the “silver lining” in a declining market.

Qualified Charitable Distributions

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.

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.

WJ Interests, LLC has provided fee-only financial advice to individuals, families and businesses since 1996. For more information, please contact us at or 281-634-9400.

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