End of the Year Money Moves

Here are some things you might want to do before saying goodbye to 2018. 

Provided by Lynn K. Berry

What has changed for you in 2018? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2019 begins.

Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.

Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.1

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax.1

Do you want to itemize deductions? You may just want to take the standard deduction for 2018, which has ballooned to $12,000 for single filers and $24,000 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income; and the medical expense deduction.2,3

Could you ramp up 401(k) or 403(b) contributions? Contribution to these retirement plans lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts are not deductible and will not lower your taxable income for the year. They will, however, help to strengthen your retirement savings.4

Are you thinking of gifting? How about donating to a qualified charity or non-profit organization before 2018 ends? In most cases, these gifts are partly tax deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.5

If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state).2,6

Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift up to $15,000 to as many people as you wish this year. A married couple can gift up to $30,000 in 2018 to as many people as they desire.7

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are not taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. A Roth IRA conversion can no longer be recharacterized (reversed).8

Can you take advantage of the American Opportunity Tax Credit? The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.9

See that you have withheld the right amount. The Tax Cuts & Jobs Act lowered federal income tax rates and altered withholding tables. If you discover that you have withheld too little on your W-4 form so far in 2018, you may need to adjust your withholding before the year ends. The Government Accountability Office projects that 21% of taxpayers are withholding less than they should in 2018. Even an end-of-year adjustment has the potential to save you some tax.10

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

We may be reached at 920-969-0717 or admin@kfgwi.com.
www.KFGWI.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Securities and Advisory Services Offered Through Harbour Investments, Inc. FoxRiver Tax Centers is privately held and is not affiliated with Harbour Investments, Inc.
Citations.
1 – nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/ [4/16/18] 2 – marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15 [10/15/18] 3 – hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/ [10/10/18] 4 – investopedia.com/articles/retirement/06/addroths.asp [2/2/18] 5 – investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp [10/1/18] 6 – savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth [9/27/18] 7 – fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx [6/28/18] 8 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [9/15/18] 9 – fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx [3/17/18] 10 – money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding [10/16/18]

Charitable Gifting

Have You Considered Charitable Gifting?

Could it make the world a better place? Could it make sense, financially?

 

Provided by Lynn K. Berry

 

A gift to charity may also help to improve your tax or financial situation. Here’s a brief look at some popular options for charitable gifting, with potentially significant tax advantages.

 

Charitable Remainder Trusts (CRTs). Taxpayers with highly appreciated assets, such as stock portfolios or real estate holdings, are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes linked to the sale. A CRT may give them a solution to this problem.

 

In exchange for transferring highly appreciated assets into a CRT, you may get: a) income payments from the CRT for a period of years or the rest of your life, b) a tax deduction for the present value of those assets, and c) tax-free compounding of those assets while they are held within the CRT. If the CRT is properly implemented and structured, the highly appreciated assets will eventually be sold from within the trust, exempt from capital gains taxes. Another plus: assets held within a CRT are usually held outside of a person’s taxable estate.1

 

After you die, whatever assets remain in the CRT will go to the charity (or charities) of your choice. What about your heirs? You can structure a CRT in conjunction with an irrevocable life insurance trust (ILIT) so that they are not disinherited; they can receive the proceeds from the life insurance policy.1

 

A charitable remainder annuity trust (CRAT) pays out a fixed income each year, representing a fixed percentage of the initial fair market value of the asset(s) placed in the trust. In a charitable remainder unitrust (CRUT), income from the trust can increase as the trust assets gain value with time; the annual payout to the donor represents a fixed percentage of the beginning-of-the-year values of said asset(s).2

 

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it annually pays a percentage of the value of the trust assets to a charity. At the end of the trust term, the remaining assets within the trust go to a non-charitable beneficiary (which could be your heirs or a family trust). By creating a CLT, you could markedly reduce your potential gift or estate tax.1

 

Charitable gift annuities. Universities often promote these charitable gifting agreements to alumni and donors. Basically, you (or you and your spouse) donate money to a university or charity in exchange for a guaranteed lifelong income stream. You may claim a partial charitable tax deduction for the donation. After you pass away, the remaining balance of your donation goes to the university or charity.3

      

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. Essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment (that is, your share of the net income paid out of the pooled income fund) varies per year.4

 

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. You get an immediate income tax deduction for a portion of the gift, which may be spread over a few consecutive tax years. You can also put more assets in a pooled income fund over time, whereas a charitable gift annuity is based on one lump sum gift.4

 

Donor advised funds. A DAF is like a charitable savings account. You make one or more irrevocable contributions of personal assets to it, and it invests and manages those assets. Each year, the DAF makes a percentage of its assets available for grants or other programs, and you advise the fund how to donate that money. DAF contributions are tax deductible under the Internal Revenue Code. Assets in a DAF are positioned to grow tax free.5

 

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and a financial professional can work directly with a school to create one.

 

Life insurance and life estate gifts. If you have an unwanted (or inadequate) permanent life insurance policy that could end up increasing the size of your taxable estate, you might want to explore gifting that policy to a charity or naming a charity as its primary beneficiary. Designating a charity as the beneficiary will route the death benefit to the charity and reduce your taxable estate by the amount of the death benefit. Gifting the policy also accomplishes this, plus it offers you a current income tax deduction for the policy’s fair market value (i.e., cash value). Some policies with face values of $1 million or more now have riders that allow 1-2% of the face value to be paid to a qualified charity; often, these riders will not impact the death benefit.7

 

Life estate gifts are an interesting option allowing you to gift a paid-off home or property to a charity, university, or other non-profit, even while you live there. You may take a tax deduction based on the value of the remainder interest of the property, avoid capital gains tax that could result from its sale, and live on the property for the rest of your life.8

 

Give carefully. Remember that some charitable gifts are irrevocable. If you are thinking about making one, remember that the amount of your tax deduction could vary depending on the kind of assets you contribute and your individual tax situation. Trusts are drafted by licensed attorneys who will charge a fee for the service. Be sure to consult qualified financial, legal, and tax professionals for more information before you decide if, when, and how to give.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Securities and Advisory Offered Through Harbour Investments, Inc.

    
Citations.
1 – fidelity.com/viewpoints/personal-finance/charitable-giving-that-gives-back [5/1/18]
2 – morningstar.com/articles/832893/when-to-use-charitable-remainder-trusts.html [10/31/17]
3 – investopedia.com/terms/c/charitable-gift-annuity.asp [9/5/18]
4 – giftplanning.cmu.edu/how-you-can-give/giving-and-generating-income/pooled-income-fund [9/5/18]
5 – nptrust.org/what-is-a-donor-advised-fund [9/5/18]
6 – investopedia.com/articles/insurance/10/giving-to-charity-using-life-insurance.asp [6/26/18]
7 – supportuw.org/gift-planning/estate-gifts/assets/real-estate/ [9/4/18]