Four Year-End Tax Strategies

Uncategorized Nov 22, 2017

“Markets Stumble as Tax Reform Hits a Snag”
“Everything That’s In The Senate Tax Reform Bill”
“This Isn’t Reagan’s Tax Reform”


At some point, you read enough predictions about what could happen in the big game that all the predictions run together. Just play the stupid game already so we can see what happens.

Every day my inbox is filled with stories about the latest news in tax reform. As a CPA I am following it carefully because it is interesting, but until we have a new law that has passed Congress, there is very little we can do for our clients. We need to press ahead and end our year as tax-efficiently as possible despite the looming changes. Here are a few tips that should help you regardless of what the IRS says on January 1st.

Capital Gains
If you have owned an investment for less than a year, don’t sell it! Investments held for less than a year are considered short-term capital gains, which are taxed at ordinary income rates. Ordinary rates mean you pay the same amount of tax on your mutual funds as you do on your salary or pension.

Investments held for longer than one year are taxed at long-term capital gains rates. This rate is lower than your ordinary income tax rate. For most of our clients, it is the difference between paying 25% in taxes versus 15%.

You do have control over the timing of your purchases and sales. Hopefully, you have an advisor who understands this difference as well and can help lower your tax bill. There is one exception to the one-year holding period: sell any investment that sucks. There is no wrong time to ditch a loser, even if you haven’t held it for 12 months.

Tax-Free Bonds
Would you prefer a dollar of income that you are going to pay tax on or .75 cents of income that is tax-free? It’s not a trick question; this is the decision you face when deciding whether or not tax-free bonds are for you.

Tax-free income sounds nice, but the answer depends on your specific tax situation. Financial planners use a formula called tax equivalent yield to determine if taxable or tax-free income is more advantageous to use. Here in Washington, it rarely makes sense for our clients as we do not have a state income tax. In higher tax jurisdictions like California, finding income that is exempt from both Federal and State income tax can make a lot of sense.

Retirement Plan Contributions
If you have not been taking advantage of retirement plan contributions at work, now is a great time to do so. Most employers will allow you to change your salary deferral month every pay period, allowing you to increase the amount you withhold during December to defer as much tax as possible into later years. Deferring from your paycheck is a significant tax savings strategy; the only drawback is you have less money available for Christmas. That is one expense that is difficult to defer past January when the credit card bill arrives.

For the self-employed, consider a SEP or SIMPLE IRA.  SEP IRAs can be established through April 15th of 2018 for the 2017 tax year (and sometimes later) and are a great way to cut down on your tax bill.

Tax Bunching
Tax bunching may not sound like a technical accounting term, but if there was ever a year to utilize it, it’s 2017. It is difficult to realize certain deductions on your tax returns until you clear a specific threshold. If you can control the timing of your spending, it would be a wise move to pay off any medical expenses, make charitable donations, and accelerate large purchases to deduct the sales tax this year instead of next potentially.
Remember, this does not mean that spending money will save you money; it only works if it is money you were spending in 2018 is paid in 2017 instead. As mentioned above, we are not trying to predict where tax reform will go, but every proposal limits the number of deductions you can take, making this a sensible strategy for this year.

Regardless of your tax situation, paying attention to the details now can save you money come tax-time in April. Unfortunately, in the spring I will have to remind a few clients of the worst time to do tax planning for 2017: in 2018. 

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