It’s hard to believe, but another year is almost behind us. With January just around the corner, now is a great time to review various items you may want to consider as you get set to enter 2018. Many of the IRS publications referenced below are for tax year 2016. Changes are not anticipated when 2017 guides are published.
Right off the bat, let’s talk about what’s on everyone’s mind: tax reform.
- Sweeping changes in the tax code were supposed to be enacted much earlier in the year, but Congress has been preoccupied with healthcare. Instead, changes appear to be in the pipeline for 2018.
Both the House and Senate have passed their respective versions of tax reform. They are currently convening a conference — a give-and-take session designed to craft a single bill that must then be approved by each chamber. Only then can the president sign the legislation, which will usher in a new tax code.
That said, how we file for the 2018 tax yearmay differ from how we file our 2017 taxes.
For example, will the alternative minimum tax (AMT) be wiped from the tax code? Will Congress kill the estate tax?
Both the Senate and House proposals make few, if any, changes to retirement accounts, but we could see tweaks in a final bill.
We are encouraged that the House and Senate have yet to materially alter the tax treatment for retirement accounts and the favorable treatment dividends and capital gains receive.
However, we should point out that the Senate bill changes the way we would account for capital gains, i.e., a first-in, first-out method to calculate gains when a stock is sold. That said, we are reluctant to speculate how these key categories may emerge if tax reform is signed into law.
Investment and financial planning
- Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.
However, we caution making changes based simply on market performance.
One of our goals has always been to remove the emotional component from the investment plan — you know, the one that encourages investors to load up on stocks when the market is soaring and sell when stocks have taken a beating.
We know markets rise and fall. We understand declines can be unnerving. Yet over the long term, markets rise much more than they fall.
While stocks have been on a record run, it’s a good time to once again remind you that a disciplined approach that avoids emotional decisions has historically been the shortest path to reaching your financial goals.
- Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
Tax planning in the context of possible changes in the tax code
4. This brings us to mutual funds and taxable distributions. This is a topic best discussed by using an example: If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 20, you will be responsible for paying taxes on the entire distribution, even if the capital gains and dividends collected by the fund occurred throughout the entire year.
Yet, following the distribution, the net asset value of the fund will fall by the amount of the payout. Put another way, your investment in the fund remains the same. It’s a tax sting that’s best avoided. Therefore, it’s usually a good idea to wait until after the annual distribution to make the purchase.
- Required minimum distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year he or she reaches 70½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70½, regardless of whether he or she is retired.
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of that year.
The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans as well as SEP IRAs and Simple IRAs.
Don’t miss the deadline or you could be subject to steep penalties!
- Contribute to a Roth IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal tax-free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500 per year, or $6,500 if you are 50 or older (IRS Retirement Topics–IRA Contribution Limits).
If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70½ and there are no requirements to take mandatory distributions.
You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.
You can make 2017 IRA contributions until April 17, 2018 (Note: statewide holidays can impact the deadline.)
- Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform, but if the situation is right, it can be advantageous to convert to a Roth IRA.
- College savings. Tax reform looms large over college savings accounts. A limited option, called the Coverdell Savings Account, gets the ax in the House bill. The Senate bill maintains the status quo, according to the Senate Finance Committee document, “Tax Cut and Jobs Act and College Access.”
Currently, total contributions for a beneficiary cannot exceed $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000. Contribution limits get phased out after hitting the respective limits.
If reform passes, the House proposes that Coverdell Savings Accounts be converted into 529 plans. A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.
- Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. For 2017, you can contribute up to $14,000. Distributions are tax free if used to pay the beneficiary’s qualified disability expenses, which may include some education expenses.
- Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. Did you know you may qualify for what’s called a “qualified charitable distribution (QCD)?” A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. The IRA owner must be at least 70½ when the distribution is made.
You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
We hope you’ve found this review to be educational and helpful, but keep in mind that it’s not all-encompassing. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.
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