Andrew Alessi, Vice President and Market Leader, Capital Region, Key Private Bank
In December 2017, Congress passed the Tax Cuts and Jobs Act. It represented the largest tax law change in 30 years, affecting both individuals and businesses, as well as the overall economy.
For many tax filers, the most significant change of the new law was the doubling of the standard deduction—$12,000 for individuals and $24,000 for married couples. Approximately 90 percent of individuals took the standard deduction in 2018.
However, there are still many facets of the law that impact tax payers and can affect individual tax liability and wealth planning goals. And has always been recommended, individual tax planning and investment management should be a year-long process, with an end-of-year review to identify smart money moves.
Capital losses can’t be carried back, but they can be indefinitely carried forward. If you want to realize paper losses on stocks while still retaining the same investment position, you can sell shares and buy shares in the same company or another company.
Also, consider taking advantage of the lower capital gains rates by pulling investments out of holdings that generate income taxed at ordinary income tax rates (e.g., bonds). Shifting them into municipal bonds or dividend-paying stocks can provide tax-free income, tax savings and ultimately may result in higher after-tax income.
With more taxpayers taking the standard deduction, many are asking what can be done to maximize your charitable gifts?
You should consider bunching charitable deductions into particular years. Or you can consider making gifts to a donor-advised fund. This will allow you to obtain the deduction now and make actual distributions from the fund at a future date. Also, you can gift low basis assets directly to charity and avoid paying capital gains tax on the appreciation of the asset. Alternatively, you can sell loss assets first and then gift the cash to charity. This allows you to take advantage of the loss to offset other capital gains.
If you haven’t already taken your 2019 required minimum distribution (RMD), consider the Charitable IRA Rollover. It allows an individual age 70 ½ or older to make a qualified charitable distribution (QCD) from their IRA directly to a charity and exclude the distribution from gross income (up to $100,000 per year).
The federal estate and gift exemption amount has nearly doubled—to $11.4 million per person. Those with taxable estates should make use of the increased exemption with the use of lifetime gifts. You can also utilize the annual per-donee exclusion of $15,000 to save on future estate taxes.
When reviewing your estate plan, consider the possibility that a reference to the exemption amount in an estate planning document that was drafted before the enactment of TJCA could create an undesirable result.
If you are trying to convert your traditional IRA to a Roth IRA to fill up a tax bracket, end of year is a good time to initiate these conversations. Traditional IRA to Roth IRA conversions can reduce future required minimum distributions and create a potential tax-free inheritance for children.
Also, with IRA planning it is important to consider the future potential legislation that could limit what is known as the “stretch IRA,” a concept that allows IRA or defined contribution plan beneficiaries to draw down the remaining plan benefits over the beneficiary’s life expectancy. The new legislation would cause inherited IRAs and inherited defined contribution plans to be distributed within 10 years of the original owner’s death.
Finally, reduce taxable income by increasing pre-tax salary deferrals to employer-sponsored retirement plans 401(k), 403(b), 457 & SEP-IRA plans. If your plan allows after-tax Roth contributions, these should be considered because of the lack of an income-level phase out for contributions and the potential for tax-free growth.
HSAs can be a great way to help pay for and save for your qualified medical expenses on a tax-advantaged basis. Contributions to HSAs are made pretax, which reduces your taxable income, earnings are free of federal tax and withdrawals are tax free if they are used for qualified medical expenses. The allowable HSA contribution levels for 2019 have increased to $3,500 for individuals and $7,000 for families. For individuals over the age of 55, there is an additional $1,000 contribution allowance. Another benefit of HSAs is that if you remain healthy, a well-funded HSA can become an important part of your retirement plan.
For more information about end-of-year tax planning and investment strategy, consult with your financial advisor. The end of 2019 is fast approaching, and making adjustments now can help save you money and maximize your earnings.
About the author: Andrew Alessi, CFP, is vice president and market leader for Key Private Bank in the Capital Region. He may be reached at either 518-257-8741, or [email protected]
Core charitable giving strategies
According to a Key Private Bank Advisor Poll on philanthropy, high-net-worth (HNW) investors and families most often engage in philanthropy and charity for moral reasons, but philanthropic investments still have a significant role in overall wealth and legacy planning.
The following is a checklist of the five core topics to cover when considering how to put charitable giving strategies to work for familial wealth.
1. Develop a family philanthropic mission
Start philanthropy planning with a cross-generational family conversation on giving goals. Nearly one-third of advisors say the most difficult part of philanthropy is defining a mission for giving, and another 20 percent say that communicating philanthropy desires to family members is the hardest part.
2. Research causes and perform due diligence
Once a family philanthropic mission has been established, remember to thoroughly research potential causes and organizations to ensure that values and goals are aligned. Two-thirds of advisors say “hardly any” or “none” of their clients use online tools like GuideStar, CharityWatch and Charity Navigator to perform due diligence and vet potential philanthropic donations prior to giving.
3. Understand differences in giving approaches
Before choosing a giving approach, understand the fundamental differences of each and how they may impact your family’s finances—both immediately and in the future. For example, certain types of donations can be claimed as tax-deductible expenses, but new deduction limitations introduced in the Tax Cuts and Jobs Act of 2017 may impact HNW investors’ ability to do so. Nearly half of advisors say they see some HNW clients choosing to donate in large lump sums (i.e., “bunching”) in light of the tax changes, allowing them to itemize in their giving years to get the deduction and take the standard deduction in other years.
4. Examine giving vehicles and strategies
As new types of charitable giving vehicles emerge — such as crowdfunding and peer-to-peer giving via social networks — consider which philanthropy strategies support overall family financial goals. Nearly 50 percent of advisors say they see more HNW investors directing one-time gifts to organizations, while 47 percent of advisors say they see more clients establishing donor-advised funds.
5. Measure the impact of donations
Philanthropy doesn’t end after a charitable donation has been provided. While measuring impact can be difficult, donating to a local cause within the community is a great way to stay connected with a charitable organization.
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