Year End Tax Ideas

The year is quickly coming to an end. While you should be focused on spending time with family and friends, make sure to get your finances in order for the new year. Here are a few ideas on how to close out the year.

Contribute to an IRA

The growth and earnings in a Roth IRA are tax free when you need them in retirement. If you have traditional IRAs, you can convert all or a portion to a Roth IRA. The amount you convert will be taxed as ordinary income for the year, so making the conversion is something you’ll typically want to do near year end since you’ll have a better idea what your tax situation looks like for the year.

Consider a Roth Conversion

The growth and earnings in a Roth IRA are tax free when you need them in retirement. If you have traditional IRAs, you can convert all or a portion to a Roth IRA. The amount you convert will be taxed as ordinary income for the year, so making the conversion is something you’ll typically want to do near year end since you’ll have a better idea what your tax situation looks like for the year.

Max out your 401k

If your employer offers a retirement plan, you should consider increasing your contributions in December to make sure that you’re putting the maximum amount into the account. For 2018, you can put up $18,500 into employer sponsored plans.

Take advantage of Health Savings Accounts

Heath Savings Accounts (HSAs) are an option for those who have high deductible health insurance plans. The maximum amount an individual can contribute for 2018 is $3,450, while a family can contribute $6,850 to a HSA. These accounts are primarily used to cover out of pocket medical expenses, but contributions can be rolled over to future years and even withdrawn without penalty during retirement.

Take your Required Minimum Distribution

Traditionally structured retirement accounts allow tax deferred growth, but at a certain point, the IRS wants to start collecting taxes from you. This come after you turn 70 ½ in the form of a Required Minimum Distribution. If you miss taking out your annual RMD, the IRS penalty is 50% on the amount you should have withdrawn. I recommend that people who need to take RMDs set up a distribution in early December so that they have time to catch any issues with the withdrawal. That, and it’s a nice way to help fund the holiday season.

Look at your Tax Withholding

This year marks the first year the new tax reform bill went into effect. If you haven’t done so already, you may want to review how much your employer is withholding. If your taxes are lower and you haven’t changed how much is being withheld, you could be sending too much to the IRS. Sure, you’ll get  a larger refund… but do you really want to give the government a tax free loan when you could better use your money?

Tax Loss Harvesting

With the recent market activity, now is a good time to review your capital gain situation. A capital gain is the amount of growth you are taxed on when you sell your taxable securities. You can offset these gains by selling investments that have lost value. If you have more losses than gains, you can carry these losses forward and apply up to $3,000 of the losses in future years.

Donate to Charity

If you have an investment that has done well, consider giving the investment to charity rather than selling. Giving away a stock that has appreciated significantly offers two tax breaks. Doing this allows you avoid realizing capital gains while taking a charitable deduction on the value of the investment. The only caveat is that you need to have held the security for at least one year.

Find the Best Business Structure

If you own a business, you may want to review your current business structure. The new tax reform bill had cut the corporate tax rate from 35% to 21%, making incorporation a potentially better option for some. Pass through entities like LLCs and partnerships also received tax breaks under the reform. With the year coming to an end, now would be a good time to review how your business is set up.