The end of the year is nearly upon us. While we focus our attention on the spirit of the holiday season, it’s also a great time to assess important aspects of your tax situation. Below is a short list of year-end reminders.
1. MAX OUT YOUR RETIREMENT ACCOUNT CONTRIBUTIONS
Depending on whether you use a Traditional IRA, Roth IRA, 401(k), 403(b), SIMPLE IRA, SEP IRA, tax advantaged retirement accounts compound investment returns over time either tax deferred or tax free. Contribution limits and deadlines for annual contributions vary by plan type, so make sure to understand how to maximize your opportunity.
Take Action: Discover your plan type contribution limits on our Essential Financial Figures document. Let us be your guide when you have questions about your retirement account or need one established.
2. PLAN YOUR YEAR-END GIVING
Means to give vary from donating food and clothing, cash and check, appreciated stock, or through a Donor Advised Fund, one of our favorite choices. By donating cash or appreciated assets to your personal foundation fund up to certain income related limits, you will receive a current year tax deduction of your contribution amount. It’s then easy to make grants from your fund to nonprofit organizations of your choice as and when you see fit.
Take Action: Ask us how you can support your preferred charitable organizations in a tax efficient way. You can contact us by phone at 816-607-5410 or email at firstname.lastname@example.org.
3. Pare CAPITAL GAINS BY Recognizing any Unrealized LOSSES
In a year when the market hit a series of new all-time highs, there may not be many losses available to offset gains. However, after a thoughtful analysis and where it makes sense, this is often a good tax reduction opportunity.
Take Action: To maintain portfolio balance, look over your unrealized gains and losses within your non-IRA investment accounts and consider selling some of your outsized gains, especially in concentrated positions. You may offset realized gains by recognizing any current unrealized losses or applying prior year loss carry-forwards that may be available.
4. Remember YOUR REQUIRED MINIMUM DISTRIBUTION (RMD)
If you are over 72 or have an inherited IRA, make sure to withdraw the required minimum distribution by the end of the year. The 50% IRS penalty on undistributed RMDs is something everyone should avoid.
5. CONSIDER CONVERTING A PORTION OF YOUR TRADITIONAL IRA TO A ROTH IRA
Traditional IRA distributions are fully taxable at ordinary income rates, whereas Roth IRA distributions are tax-free, including any earnings you may have accumulated over the years. It could make strategic sense to realize taxable income now by converting a portion of your traditional IRA to a Roth IRA for the potential long term benefits of tax-free accumulation of principal and income.
Take Action: Work with StrongBox Wealth and your accountant or tax advisor to determine how much, if any, Roth conversion income may be appropriate to incur given historically low current tax rates.
6. ACCOUNT FOR MUTUAL FUND CAPITAL GAIN DISTRIBUTIONS
Many estimates for actively managed stock mutual funds are over 5% and several are expected to be more than 10% of underlying asset values this year. This unforeseen taxable event could push you over income tax rate thresholds. Take inventory now to be prepared for an event that could add significant tax liability.
Take Action: We prepare capital gain estimates for prospective clients. Send us a list of your fund holdings and we will create this report for you to illustrate your potential tax exposure and potential repositioning ideas to consider.
7. UNDERSTAND THE TAX IMPLICATIONS OF YOUR EQUITY COMPENSATION
Stock options such as Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs), Restricted Stock Options (RSUs), Employee Stock Purchase Plans (ESPPs) are all taxed differently. Understanding your current year and ongoing equity compensation tax impact is an essential element of a well devised comprehensive financial plan.
Take Action: Collect your relevant equity compensation program documents and schedule an appointment with us to understand your tax exposure. Together with you, we will craft a customized and tax efficient action plan tailored to your personal circumstance.
8. REVIEW YOUR PAYCHECK WITHHOLDING
Depending on your W-4 designated tax withholding allowances, you may end up with a refund or owing taxes, often based on designations established years ago with your employer. Many individuals forget W-4 updates after significant events such as a marital status change or when a child is no longer claimed as your dependent. It is a quick remedy to properly calibrate your tax withholding to avoid a surprise at tax time.
Take Action: Use the IRS Tax Withholding Estimator to discover if you have been withholding the proper amount. If you believe corrective adjustments should be made after your review, request a W-4 and file it with your employer.
9. ASSESS YOUR INCOME AND LIQUIDITY NEEDS FOR THE YEAR AHEAD
Any known liquidity and income distribution needs should be planned and prepared for well ahead of time by providing ample means of cash-based instruments to cover expected expenses. Backup liquidity plans should also be in place for unplanned life events that occasionally surface throughout any given year such as major home repair, unforeseen health expenses, or assisting a family member.
Take Action: Talk with us about potential changes to your income or upcoming cash outflows. With the markets near all-time highs, it may be prudent to adjust your portfolio in alignment to your upcoming needs or replenish diminished cash reserves.
10. REASSESS YOUR RISK TOLERANCE
The time to reassess your risk tolerance level is when markets are relatively calm rather than when both market volatility and principal fluctuation are amplified.
Take Action: Take our brief, yet thorough, Risk Assessment. We’ll then guide you through a series of uncomplicated steps, designed to ensure your investment portfolio properly aligns with your return expectations.
contact us today to schedule a private consultation