Year-End Financial Planning Moves to Get Organized and Reduce Taxes

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With the new tax code in effect starting in 2018, now is a great time to consider some smart planning moves to make before year-end. Decisions about whether to delay income or accelerate expenses will, of course, also depend on your particular situation. But if you’re a professional or a business owner, you are running out of time. Implement these year-end strategies now to reduce your tax bill and help you reach your future financial goals.

It’s also a good time to revisit your retirement accounts, benefits packages, insurance policies and spending plans. You want to ensure that everything is updated and accurate before year-end. And the same rule applies to any estate planning documents if any significant changes/events occurred during the year.

With the holiday season and its chaos upon us, here are some strategies to get your financial life organized. They can be addressed now. Before you’re up to your neck in gift wrap, holiday parties, travel plans and home decorating. The holidays invariably end up creating a certain amount of stress – like when you exceed your holiday budget. So consider these smart year-end planning moves before the holiday season gets ahold of your sanity.

Prep-pay expenses before year-end

Business owners looking for ways to reduce 2017 income should consider pre-paying 2018 business expenses before year-end. Do you pay monthly subscriptions to software or content providers? Many of those companies offer discounted prices for subscriptions paid annually versus monthly. Pay the 2018 annual fees before year-end to lower the cost and further reduce your 2017 business income. Other 2018 business expenses to consider pre-paying in 2017: office rent and utilities, telephone, marketing materials and costs, business cards, advertising, memberships, accounting/bookkeeping, legal, etc. Call your advisor or accountant to determine the best pre-payment strategy for you.

Thinking about the mortgage interest deduction? With the possibility of a new income tax code looming, there may not be incentive to pre-pay your January 2018 mortgage payment this December to deduct the interest from your 2017 tax bill. We’ll have to keep an eye on this one.

Rebalance your investment portfolio

Review your investment portfolio for winners and losers before year-end, especially with the stock market moves this year. Already booked large capital gains during the year? Now may be a good time to sell depreciated stock to offset those gains with capital losses. To make the losses less painful, consider tax-loss harvesting.  Reinvest the proceeds into similar securities to capture the loss but maintain the position. For example, sell Exxon Mobil shares and buy Chevron shares to keep your large-cap energy sector exposure the same. But look out for wash sale rules and avoid buying investments that are ‘substantially identical‘ either 30 days before or after selling your securities. And remember, options are included in the wash sale rules.

Do you have 401(k) accounts from old jobs? What do you do with all those statements? It may be time to consolidate and rebalance all of your various retirement accounts. Doing so gives you a clear picture of the holdings in your overall portfolio. How are you confident about your retirement plan if you don’t even know what you own in all your investment accounts? Simplify by consolidating. Organizing your investments will cut down on the number of statements you review each quarter. Consolidation also makes it much easier to allocate and rebalance your holdings.

Watch out for capital distributions

December is the month that many mutual funds pay out dividends and capital distributions. If you own shares of a mutual fund on the ex-dividend date, then you’re entitled to your share of the capital distributions that are paid out. Sounds good, right? Not so fast.

The downside is that the share price usually falls by the same amount when the distributions are paid.  So the net effect to you is zero. This is important because you pay taxes on the distributions. Even though the fund is essentially just returning a portion of your purchase price. Planning to buy mutual fund shares in December? It may be a good idea to buy shares after they pay out capital distributions.

You may consider selling some of those mutual funds and reinvesting the proceeds into Exchange Traded Funds, or ETFs. An ETF is a basket of securities that typically mimic an index or benchmarks such as a particular industry, geographic region, or theme. Unlike mutual funds, ETFs are typically passively managed, bringing down their expense ratio significantly when compared to actively managed mutual funds. Since approximately 80% of mutual funds fail to beat their long-term benchmarks, the cost savings on expenses have a huge impact on your annualized returns over time. Also, mutual funds have higher turnover – trading stocks within the portfolio – compared to ETFs. Higher turnover means more taxable events passed on to you, the mutual fund shareholder.

Max out your 401(k) contributions

If you still haven’t contributed the maximum amount for the year to your 401(k) account – $18,000, or $24,000 if age 50 or older – increase your pre-tax contributions before year-end. Doing this brings down your taxable income and puts more money away for retirement. At the very least, take full advantage of your employer’s matching contributions. Otherwise, you’re leaving free money on the table. This is one of the financial strategies that gets overlooked often.

Small business owners have retirement plan options as well. From SEP IRAs to split-funded defined benefit plans, there are many options to help you reduce current year income and save more towards retirement. And there may still be time to get something set up for 2017 if you act quickly.

Donate or gift appreciated stock before year-end

Do you own stock that has appreciated in value over time? Donate some of those shares to your favorite charitable organizations rather than selling stocks and writing checks. Donating appreciated stock directly to a charitable organization allows you to report it on your tax return at the market value on the date of the donation rather than the original cost basis. So shares worth $10,000 when donated directly means you report the deduction on your tax return as a $10,000 charitable contribution – even though you may have paid $500 for them ten years ago. If you sell the shares yourself and donate the cash instead, you’ll pay taxes on the $9,500 capital gain.

Want to keep the money in the family? For higher income taxpayers who wish to sell assets held for more than a year, it may make sense to gift these assets for subsequent sale to a child or another family member in a lower tax bracket. You will avoid gift and estate tax liabilities by making tax-exempt gifts of up to $14,000 per beneficiary. Just be cognizant of the kiddie tax when gifting to children under the age of 19 (or 24 for full-time students).

Don’t forget about Required Minimum Distributions

This topic isn’t directly relevant to Gen X and Millennial taxpayers, but they may want to make sure that parents and/or grandparents are aware of the rules concerning required minimum distributions. The important thing to know: once you’re over age 70 ½, the federal government requires you to take annual distributions from your Individual Retirement Accounts (IRAs). So make sure to take your distribution before year-end. If you fail to do so in a given year, be prepared to write a check to the IRS for 50% of your calculated RMD as a penalty. That’s right – if your RMD was $5,000 and you don’t take it during the year, then you have to pay $2,500 to the federal government. This falls into the “worst financial strategies” category, so don’t let it happen to you.

Review open enrollment options

Your health insurance benefits may have changed during the year. You should pay close attention to the costs and benefits of the various options offered by your employer.

For small business owners, consider any changes you want to make to your health insurance policy prior to year-end. There may be more cost-efficient options out there, including special tax credits for smaller group plans. But it’s important to look at the trends and how they may impact your firm as well as your bottom line.

Consider Flexible Spending Accounts

If you have an FSA, you’re probably rushing to schedule appointments with doctors and dentists before year-end so you don’t lose those funds. If you still have cash in the account, consider purchases such as prescriptions, eyeglasses, or contact lenses. If you don’t have an FSA, now is a good time to think about joining your employer’s 2018 flexible spending plan or starting one for your business. The money in this account can be withdrawn tax-free for qualified medical and childcare expenses, but (in most cases) any balance at year-end is forfeited.

There are FSAs that offer grace periods and money in accounts can carry over from year to year. Contact your employer’s human resources department so you know your options.

Review your insurance policies before year-end

It’s important to review your various insurance policies – health, life, home, auto, long-term disability, long-term care – to ensure that your coverage is adequate. If you’ve experienced a major event during the year, make sure to consider how it impacts your insurance plan. And don’t forget to consider adding disability insurance to your portfolio if you haven’t already. This is especially important for business owners and families that rely heavily upon one income provider.

There are numerous financial strategies involving insurance. It’s a good idea to sit down with a licensed, independent broker every year or two to review the policies you own. They may be able to find you lower premiums, greater benefits, or both. Keep in mind: older insurance policies may still use the older mortality tables (which means you’re paying higher rates for lower benefits).

Another consideration for entrepreneurs, business owners, or partnerships to ensure continuity in the event that something happens to you or another owner/partner: buy-sell agreements funded with life and/or disability insurance policies. Having one of these policies in place allows the business to continue operating by providing the surviving owners/partners with the funds to purchase the shares of the deceased owner/partner. It could save you, your family, and your partners a significant amount of stress during a time of crisis and mourning.

Update your spending plan

Nobody likes to build a budget, but now is the perfect time to create a plan to track your money inflows and outflows. Work with a professional to create a realistic plan that’s designed for you and keeps you accountable throughout the year. There are a myriad of online budgeting tools to build a simple budget and track spending on your own. At Blue Keel, we offer a personal financial website to help clients track their spending, analyze trends and keep them accountable by working together with their advisor. You’ll be surprised to see where your money goes – and how much of it is going – when you start tracking your expenditures.

Review your beneficiary information

If you’ve experienced a major life event during the year – marriage, birth of a child, divorce – then it might be time to review the beneficiary information on your insurance policies, IRA, and/or 401(k). Failure to update a document after a divorce or forgetting to name a beneficiary may deny future generations their rightful inheritance. This is one of the most important financial strategies to consider on an annual basis.

Important note: Beneficiary designations trump your Will.

For business owners, it’s critical to review beneficiaries to ensure the continuity of your company in the event of your death. Even small disruptions in operations can have a catastrophic effect on your firm’s relationships with customers, suppliers, and partners – not to mention how it could impact income.

Establish or replenish your emergency fund

If you haven’t set aside 6-12 months of living expenses in a savings account, then now is the time to start. If you dipped into your savings during the year, now’s the time to build it up again. The holidays can get expensive, but having cash available on short notice to pay for unexpected costs like a new hot water heater or roof is one of the financial strategies for which to be truly thankful.

For small business owners, it may be advisable to save an even larger emergency cushion to fund any business-related costs that arise unexpectedly. Even with the opportunity cost associated with funds sitting in an account that pays very little interest, it pays off when you need it most. An advisor or financial planner can help you develop a strategy that allows you to simultaneously save for emergencies, retirement, college, and other personal/business goals.


About the Author

Charlie Shipman left Wall Street and founded Blue Keel Financial Planning in 2014 to provide independent, fee-only investment management and comprehensive financial planning to professionals, business owners, entrepreneurs and their families. His goal is to help clients align their personal and business finances with the lives they want for themselves and their families. Areas of expertise include: cash flow planning and budgeting, business planning, financial planning, portfolio management, college funding, estate planning and risk management. Charlie has been featured in many respected online financial publications such as MSN, Yahoo! Finance, Nasdaq, Money, CBS News, The Motley Fool, and Investopedia. Charlie resides in Weston, CT with his wife and two young children, and serves as Treasurer for the Friends of Weston Public Library, Assistant Treasurer for Emmanuel Episcopal Church, and was recently a member of the Town of Weston Strategic Planning Committee.

For more information, or to reach Charlie, send an email to [email protected].




Author: Charlie
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