Thanksgiving is nearly here, starting the year-end stopwatch. In between your turkey brining, holiday shopping, candle lighting, dreidel spinning, Festivus poling and tree trimming, you might also spend some time on year-end tax planning. Getting your ducks lined up could save you a few bucks. Or perhaps just prevent a little angst you don’t need at this joyous—and stressful—time of year.
Required Minimum Distributions (RMD)
Those over 70½ who have traditional Individual Retirement Accounts (IRAs)—retirement accounts funded with pre-tax dollars—must take their required minimum distribution (RMD) or risk facing IRS penalties. Most folks must take this distribution by December 31. However, if you turned 70 ½ in 2018 and this is your first RMD, you may be able to put it off until next April 1. But there are tradeoffs. While the extra time may be nice and might mean you have less taxable income in 2018, it means you must take the equivalent of two distributions in 2019. Hence, it could beef up your 2019 taxable income (and tax bill).
As for how much you need to withdraw, your IRA’s custodian should typically provide your RMD amount and paperwork. If you have multiple traditional IRAs, your RMD is based on their combined value. When rounding these up, leave out your Roth IRAs (tax-exempt IRAs funded with after-tax dollars), which aren’t subject to RMDs. You will also want to consider the amount you want withheld for taxes.
Tax-Deferred Retirement Plans
401(k) (or other tax-deferred plan) participants who haven’t reached deferral limits might be able to make adjustments to sock away a little more while there is still time. For 2018, people under age 50 can defer $18,500, while those over 50 can contribute $24,500 ($18,500 plus a $6,000 catch-up contribution). These limits jump to $19,000 and $25,000 ($19,000 plus a $6,000 catch up), respectively, next year.
If either you or your spouse has taxable earned income, you can make an IRA contribution, but whether or not it qualifies as tax-deductible depends on your income level and filing status. Deductibility phases out as your adjusted gross income rises. For 2018, the IRA contribution limit is $5,500. Those over 50 can make a $1,000 catch-up contribution, bringing their limit to $6,500. In 2019, these limits rise $500 to $6,000 and $7,000 for those over 50. Spousal IRAs allow contributions for non-working spouses as long as the contribution doesn’t exceed the working spouse’s taxable compensation. While folks have until next April 15 to contribute for the 2018 tax year, doing so now gives you one less thing to worry about come tax time. Moreover, getting contributions invested sooner means more time in the market—something generally good to maximize during a bull.
Mutual Fund Distributions
Mutual fund owners should be aware funds are required to distribute income from interest, dividends and capital gains annually—a taxable event. Ironically, this sometimes means that if you own a fund whose value has declined, and you haven’t sold it, you can end up with a taxable capital gain. This is because regulations require investment gains and losses within the fund—not in its share price—to pass through to investors—so you pay a slice of capital gains taxes on gains the fund manager realized as part of day-to-day portfolio management and meeting other investors’ redemption requests. This can be particularly annoying for high-net-worth investors using mutual funds, as it magnifies the size of the distribution (presuming they don’t own like 100 funds)—and the potential tax bill. Funds must notify shareholders of the record date—the date as of which shareholders of record are eligible for the distribution. If you own funds, knowing these dates can help you prepare for the potential tax consequences.
Tax Reform and Deductions
Last year’s tax reform could also have implications for your 2018 taxes. The IRS provides an overview for individuals and families that you may find useful. For those who itemize deductions—likely a far smaller number of folks, given the reform doubled the standard deduction—the law lowered the threshold for tax-deductibility of unreimbursed medical and dental expenses from 10% of adjusted gross income in 2017 to 7.5% for 2018. In 2019 it goes back to 10%, so those with the flexibility might want to incur expenses sooner. Beyond that, there are now limits to deductions for state and local income tax paid, as well as property taxes.
On the flip side, the law preserved deductibility of charitable contributions and raised the limit—most folks can now deduct up to 60% (instead of 50%) of their adjusted gross income. Additionally, if your mortgage is $750,000 or smaller, you can probably still deduct the interest on it—talk to your tax advisor to be sure.
With holidays approaching, it may be handy to know annual gift tax exclusion limits rose this year. For 2018, each individual can give $15,000 per recipient—up from $14,000 in 2017—before gift taxes kick in. Certain exclusions, like tuition and medical expenses, may apply. You may want to discuss these and other tax law changes with your tax advisor soon, in case you need to act before yearend. Maybe you can sneak it all in before the parties start!
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.