With only a few weeks before the end of the year, now is a good time to review tax and other financial documents to avoid the late-December rush, say financial planners.
Dec. 31 is the last day to take advantage of opportunities to lower taxable income in the current year for the most part, and waiting until the last minute to take action may mean missing a deadline. Financial planners say their phones start ringing late in the year with these queries.
Timothy M. Steffen, director of financial planning for Baird in Milwaukee, says there weren’t a lot of legislative changes in 2016 from a tax standpoint.
[See: 7 Ways to Avoid Financial Stress Over the Holidays.]
“But don’t get lackadaisical as a result of that. Just because the rules haven’t changed doesn’t mean your situation hasn’t changed,” he says. “There may be some planning you need to do because of things you’ve done.”
Major life changes like marriage, divorce, births or deaths in the family almost always change a household’s financial picture. For people who might be thinking about retiring, they should find out how that transition impacts their financial planning.
Financial planners offered these tips to help people get these strategies in place.
Boost 401(k) contributions. Joe Heider, founder of Cirrus Wealth Management in Cleveland, says many of the year-end questions he gets from clients surround additional tax planning. One way is to fully maximize 401(k) contributions.
“Most people aren’t maxing out contributions. You can develop a plan to set up a substantial amount more which will help reduce taxes,” he says. “Even if you can only increase it a small amount it can make a substantial difference.”
Deferral limits are $18,000, with anyone over age 50 able to put in an extra $6,000.
Steffen says people have until Dec. 31 to make retirement contributions to these types of plans, although with individual retirement accounts people have until April 15 to have it apply for 2016.
If it’s not possible to fund a defined contribution plan this year, Heider and Steffen say people need to at least create the plan this year which gives them the ability to fund after the first of the year.
Ann Swarts, managing director at accounting firm CBIZ in Kansas City, Missouri, says another shelter is a health savings account. For people who have high-deductible medical plans it allows them to put money in tax deferred to pay for medical expenses later.
“Some employers do it through your employer withholdings, but you don’t need to have earned income to have it,” she says.
[See: 10 Costs You Can Eliminate in Retirement.]
Charitable contributions. The year-end is often considered “the giving season” because many people make charitable contributions at this time to reduce tax liabilities.
Many items can be considered charitable deductions, from used goods to cash and stocks, Heider says. There are limitations on how much you give and who you give it to, Steffen says.
People can offset 50 percent of their income if they give cash gifts to public entities like churches, universities or registered charities, he says, while people can offset 30 percent of their income with gifts of stock or appreciated assets. Steffen says those offset figures are total, not cumulative, so it’s either a reduction of 50 percent or 30 percent, he says.
Swarts says givers who use appreciated stock can get “more bang for your buck, since (Internal Revenue Service) doesn’t take into account capital gains, and you get fair market value for deduction.”
She also notes the IRS made permanent people’s ability to donate up to $100,000 from their individual retirement accounts. This can help people over age 70.5 who are subject to required minimum distributions from IRAs.
“Instead of taking the RMD, it can go directly to a charity and that helps lower adjusted gross income. That way you can use more of your itemized deductions and it’s better if you deal with AMT (alternative minimum tax),” she says.
Tax-loss harvesting, other donations. People who lost money from their investment portfolios can offset 100 percent of their gains and carry forward up to $3,000 to the next year, Heider and Swarts say.
Gifts into 529 education plans allow people to take state tax deductions, Swarts says, and both Swarts and Steffen says people can use the gift tax exemption to transfer wealth. That limit is $14,000.
Family business owners who might want to make business-interest transfers to other family members may want to do that this year, Steffen says. There’s been some discussion recently in the Treasury Department of ending discounts for marketability and lack of control. These allow business owners to transfer assets of a certain dollar value, but treat it at a discount for tax purposes.
“These discounts are likely going away next year. So what we’re telling people is if you’re a business owner and thinking of transferring some of that business to someone else, you may want to do it sooner rather than later to take advantage of some strategies out there,” he says.
Review documents. Aside from tax planning strategies, people should take this time to review other key documents in their life, the planners say. That includes looking at who are designated as beneficiaries in wills, trusts and other estate documents. It’s also a time to review any insurance needs.
Steffen says no matter what people do at this time, take actions with a view toward the future.
[Read: How to Find a Great 529 Plan to Pay for College.]
“It should be considered a multiple-year analysis. What kind of strategy you do this year will have an opposite effect next year,” he says. “For example, if you defer income out this year into next year, will it increase your liability even more for next year? Don’t look at in a vacuum. Do a two-year comparison.”
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4 Year-End Financial Planning Steps to Take Now originally appeared on usnews.com
