Friday, January 21, 2022

Proactive, Not Reactive

Ask The CFP® Practitioner

“The beginning is the most important part of the work.”
              ~ Plato, Classical Greek Philosopher

Question: Could you highlight possible items to review before year-end that may provide tax-savings? This would be a perfect follow up to the last column on tax reform changes.

Answer: There are a few items you can consider that may help you prepare and make most of any year-end financial moves. As always, discuss these strategies with your team of trusted professional advisors who are most familiar with your situation.

There is still time to manage income and deductions while paying close attention to anything that might push you into another tax bracket. These methods could defer income or accelerating deductions, possibly minimizing a current tax liability.

If you’re still working, some companies may allow you to defer bonuses and other income into a future year. Another way to possibly reduce taxable income before year-end is to make charitable gifts. Gifting can help a cause you care about while possibly reducing taxable income. Make sure any gifts are well-documented.

Contributions to traditional retirement plans such as an IRA, 401(k), or 403(b) may defer taxation of income. The taxes are payable when funds are withdrawn in the future, presumably when your income and tax rate may be lower.

If you’re turning age 70½ this year, it’s time to think about required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs). If you don’t take your RMD for 2018 by December 31st there will likely be a 50% penalty on required amounts not taken. To avoid this, consider automating your RMDs with your CERTIFIED FINANCIAL PLANNER™ professional to ensure that you won’t miss these important deadlines.

In the year you reach age 70½ you can take your first RMD, or you can wait until April 1 of the following year. If you delay and take two distributions in the first year after turning 70½, your income could be inflated, which may increase your tax-bracket standing. Be mindful of how taking a distribution will impact your taxable income or tax bracket. If you have space left in your bracket or a year when income is down, you may want to consider taking additional distributions. All future RMDs must be taken no later than December 31 of each calendar year. If you’re charitably inclined, qualified charitable distributions (QCDs) allow traditional IRA owners to transfer RMDs up to $100,000 to qualified charities and exclude the amount donated from their adjusted gross incomes. As an aside, you also can gift up to $15,000 tax free to as many individuals as you wish although it won’t provide tax savings.

Tax loss harvesting is a technique that involves selling a losing investment to offset any realized gains, or to establish a deduction of up to $3,000. Excess losses can be carried forward to future years. With your trusted financial advisor, examine the important subtleties of wash sale rules when trying to decrease your tax bill. A wash sale is the sale of a security at a loss and the purchase of a substantially identical security within 30 days before or after of the sale date. The IRS frowns on this behavior as you’re negating the purpose of selling an investment by replacing it so soon. The IRS looks at all your accounts, retirement accounts included, to see if a wash sale occurred, and if so, the loss deduction will likely be disallowed.

Keeping your advisors informed of any major life changes may help them more effectively plan for potential tax savings. For instance, moving from one state to another with differing tax policies could influence tax planning. Also, going forward, moving expenses are only deductible for those in the military. The addition of a new family member, divorce, death, windfalls, or losses are all circumstances that could affect year-end planning and may also necessitate updates to your estate plan.

Year-end is an appropriate time to identify and manage various income sources. Evaluating and differentiating between the tax treatment of earned income, corporate and municipal bond interest, qualified dividends, retirement plan distributions, and other miscellaneous revenue resources may aid in possibly reducing the overall tax impact. Before deviating from your long-term investment strategy just to take losses, consult with the appropriate professionals. Stay focused and plan accordingly.

*Withdrawals prior to age 59½ may also be subject to a 10% federal penalty tax. RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Raymond James advisors do not provide tax advice and are not qualified to render advice on legal matters. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. There may be tax-consequences to tax-loss selling. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Raymond James is not responsible for the content of any web site or the collection or use of information regarding any web site’s users and/or members.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may
be reached at (239)389-1041, email

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