While financial planning is a year-round activity for us, the fourth quarter presents individuals and businesses with great opportunities to optimize their financial strategy and tax outcomes for 2018. Here is a checklist to keep your plan on track:
1: Practice tax efficient investing. Keeping an eye on how taxes can affect your investments is one of the easiest ways to enhance returns over time. If you have a trust or standard brokerage account work with your financial advisor to evaluate positions for potential tax harvesting opportunities. Tax harvesting is the act of selling a security that has experienced a loss. This allows investors to offset taxes on both gains and income. However, because of the wash-sale rule the security that was sold cannot be repurchased within 30 days to reap the tax benefits. Also, remember that the IRS limits your deduction to $3,000 of capital losses per year (any unused losses can be carried forward into future years).
2: Review insurance policies and coverage. Insurance isn’t exciting, but it is part of a sound long-term financial planning process. Therefore, set aside time to organize and review your insurance policies to prevent any lapses in coverage. Start by reviewing the basics of each policy: insurance carrier, policy number and date issued. Then breakdown the coverage, who is the beneficiary? What risks does the insurance cover? Do you have the proper coverage?
3: Maximize contributions to tax-advantaged retirement savings accounts. On October 19, 2017 the IRS announced new 2018 contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500. The Highlights of Changes for 2018 published by the IRS also discusses individual retirement accounts which may be tax-deductible too. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels. Health savings accounts can also be saving vehicles. If you have a health savings account (HSA) associated with a high-deductible health plan, see if you are contributing the max in 2018: $3,450 for an individual and $6,900 for a family, plus an extra $1,000 if you are age 55 or older. An HSA has triple tax benefits: Your contributions are made with pretax dollars, so you reduce your current taxable income; earnings are free of federal tax; and so are withdrawals, if they’re used to pay for qualified medical expenses now or in retirement.
4: Protect your identity. Cyber criminals are always targeting credit accounts and debit cards, the IRS also warns taxpayers about the dangers of theft and fraudulent returns. From 2011 through October 2014, the IRS stopped 19 million suspicious returns and protected more than $62 billion in fraudulent refunds. The first step to protecting your identity is enabling two-step security on your email accounts associated with financial institutions. Secondly, always be cautious of emails from companies your unfamiliar with, these phishing scams are a common way con artists attempt to violate your personal security.
5: Take advantage of tax credits. It is important to be aware of the differences of tax deductions and credits. A tax deduction is a dollar amount the IRS allows you to subtract from your adjusted gross income (AGI), making your taxable income lower. The lower your taxable income, the lower your tax bill. Sounds good but tax credits are even better. A few credits are even refundable, which means that if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for $750. Various tax credits are available to people with kids, people investing in an education or retirement accounts and people who made big-ticket green purchases. In addition, the IRS offers 27 ways for businesses to take advantage of credits, see if your business qualifies.
6: Consider charitable giving. Keep records of your donations to charities in all forms and consider strategies that may qualify you for larger tax deductions. Donating to charities from a taxable account can reduce your tax bill. For non-cash contributions over $250, you’ll need a receipt that includes a description of the item and other details. Donations for the current tax year must be made by December 31. If you charge your gift to a credit card before the end of the year, it will count for this year, even though you might not pay the credit card bill until 2018. However, in order to earn the full deduction you must actually donate cash or property. The charity must also be a qualified tax-exempt organization. Read the IRS’s “Nine Tips on Deducting Charitable Contributions“.
The Bottom Line
Use this checklist to get ahead before the holiday rush, year-end financial moves should be part of the discussion with your advisor and family. There are significant benefits to creating an actionable to-do list of financial planning points that we can check off together as you sail on toward the new year.
In fact, research proves that working with a financial advisor adds about 3 percentage points of value in net portfolio returns over time according to Vanguard. Value is delivered in three elements: wealth management, portfolio construction and behavioral coaching. Together these elements are the recipe for financial success and clients who understand this process will benefit most from our services. We are happy to go over this checklist and strategies that are most revlevant for you, schedule your call, video conference or in-person meeting.