It feels a little hard to believe, but there are only a few months left in the year. This means your tax planning window is still open. And, with this year’s new tax law, tax planning might be even more important than usual.
One of the most overlooked tax strategies – specifically designed for lower income taxpayers – is capital gains harvesting. For some investors, realizing gains before year-end can actually be tax-free. If your taxable income happens to fall in the 12% federal tax bracket, you can sell investments that have gone up – immediately repurchase that same investment to reset your cost basis higher – and magically owe zero federal tax. Too good to be true? It’s not.
For retirees, using your IRA as your charitable donation tool is a great tax trick. After age 70½, you are allowed to donate to charity directly from your IRA and your donations won’t count as taxable income. Once you hit age 73, it gets better. Your IRA donations will even help satisfy your annual required minimum distributions, known as RMDs. This tool is a no-brainer.
Your RMDs can also help you manage your tax payments. Withholding the right amount of taxes directly from your IRA distributions can completely eliminate the hassle of having to send in quarterly estimated tax payments. If you don’t really need your RMDs to fund your life during the year, you might want to wait to take your IRA distribution until you’ve done your year-end tax projection. After you estimate your overall tax liability, you can then just withhold what’s needed in one fell swoop. Tax season really shouldn’t feel very suspenseful.
With the new tax law’s senior deduction for those over age 65, Roth conversions might look even more favorable now. As a refresher, Roth conversions are about moving some money from your traditional IRA to a Roth IRA. The idea is to voluntarily pay your taxes now rather than later on in retirement. Of course, this decision needs to be backed up by a detailed tax analysis. This requires some tax expertise, so don’t wait until the holiday week between Christmas and New Year’s to ask for professional help.
For retirees considering Roth conversions, or realizing capital gains, you do need to keep an eye on triggering the Medicare premium surcharge, also known as IRMAA. If you don’t plan well, this surcharge can sneakily add hundreds, even thousands, to your annual Medicare premiums. It’s yet another reason to do a careful analysis late in the year when most of your tax data is known.
Finally, my list wouldn’t be complete without mentioning portfolio rebalancing. The markets have been surprisingly strong this year. It’s always tempting to let tax management crowd out risk management. That would be a mistake. In other words, don’t let the tail wag the dog.
