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2018 Year End Tax Planning - Part 2

So you've already read "2018 Year End Tax Planning - Part 1",well here are even MORE strategies you may wish to utilize prior to December 31:

Be careful of year-end mutual fund purchases – Many mutual funds pay out dividends and large embedded capital gains at the end of the year, which will be reportable by the owner of the fund as of the “ex-dividend date.” While it may seem like a good idea to buy shares before this date in order to receive the extra income, it is important to be aware that the payout causes the share price to fall by that same amount. Not only that, but even if you automatically reinvest the dividends, you still have to pay tax on that income (assuming the shares are held in a non-qualified account). For some people, it may make sense to sell a mutual fund prior to a large capital gain distribution and reinvest that money in a low-cost ETF in the interim, then re-purchase the fund at a later date (again, be careful of the wash sale rules). Note that this situation usually only benefits people who are holding a fund without a large unrealized capital gain; otherwise, the sale of the fund will trigger its own capital gain on the net proceeds. 

Make gifts to family – Not only can you help your family financially, you can also receive a tax benefit by gifting certain property. For example, if you gift a stock or mutual fund prior to the ex-dividend date (as mentioned above), the new owner will be responsible for reporting the distributed income. This can make sense if you have a sizeable position with a large expected distribution and can shift the income to a beneficiary in a lower tax bracket than yourself.  You can give $15,000 per year, per beneficiary free of gift tax. Giving property to family can also help you to reduce your estate.

Divorce Planning – For divorces after December 31, 2018, the alimony tax rules will be reversed. This means that the spouse paying the alimony will no longer deduct this, and it will not be taxable to the spouse receiving the alimony.  For couples going through a divorce, they may want to consider finalizing this in 2018 so they can continue the prior rules on alimony income. This rule is permanent after 2018 and does not expire, so if you are in the process of a divorce, please keep in mind this new rule.

Bunch itemized deductions – Taxpayers who do not have enough itemized deductions in a given year may want to consider “bunching” items together in order to exceed the standard deduction threshold. This is especially useful in cases where an item must exceed a percentage of AGI in order to be deducted. For example, if you know that you (and your spouse, if applicable) might need certain medical procedures in the near future, it may make sense to schedule them within the same tax year so that you are able to meet the AGI threshold for deducting medical expenses.

Contribute to a 529 Savings Plan – If you would like to help someone save for college, a 529 Savings Plan can be the perfect vehicle. These accounts let you contribute on a state tax-deductible basis (depending on where you reside) and distributions are tax-free if used for qualified education expenses. These accounts also allow you to use up to $10,000 on K-12 tuition expenses.

Review your withholding – To reduce the chances of owing money at tax time, make sure that your current tax withholding is as up-to-date and accurate as possible. You can use online tools to help calculate the correct amount; if you have been withholding too little, try to approximate the amount of additional withholding necessary to break even. To adjust the percentage for the final few pay periods of the year, all you need to do is file a revised W-4 with your employer.

 

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Financial Planning Department
Hefren-Tillotson

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Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.