With 2018 drawing to a close, it's time to get busy making holiday plans. It's also time to get serious about year-end financial planning.
During the hectic holiday season, it can be tempting to put off financial decisions until the new year, but taking certain steps now may well be worth the effort. Timing is especially important when it comes to making tax-related moves that may reduce what you owe when filing season rolls around.
"The year end is a busy time for all of us," say Laurent Carrier, a financial planner and owner of Carrier Financial Services LLC in Colorado Springs, Colorado. "There are some things that can always wait, but there are a couple of tax-related planning opportunities that truly have a deadline of Dec. 31."
Here are three key items that you should be thinking on during the final months of 2018.
1. Reducing your personal tax liability through tax-loss harvesting. The fourth quarter is an optimal time for tax planning because, by now, many of us have a good sense of how our personal and financial lives have changed over the past year.
Tax-loss harvesting is one way to reduce taxes on realized capital gains from winning investments. Start by evaluating what you own in your portfolio and why you own it, and then consider selling some holdings that have lost value by the end of the year.
These so-called realized losses can be used to offset realized capital gains. If losses exceed gains, taxpayers are allowed to deduct up to $3,000 from their ordinary income. Any excess loss can be carried forward to future tax years.
“If you're a retiree who relies heavily on investments in taxable accounts for income, this strategy is worth considering,” says Laurent Carrier.
"Tax-loss harvesting is generally for people who have taxable income and are looking to create a write-off via taxable loss," he explained.
2. Charitable giving by means of stocks, bonds or mutual funds. It feels good to support your favorite charity during the holidays. Of course, doing so can have some nice tax benefits, too.
Many people simply donate cash or personal property to charities, which, while well intentioned, may not be the most effective way to maximize the tax breaks tied to charitable giving. One frequently overlooked strategy is to donate stocks, bonds or mutual fund holdings that you've owned for at least a year and that have risen in value.
By doing so, you get an income-tax deduction and — because the securities are donated, not sold — you won't owe capital gains taxes, according to Laurent Carrier of Carrier Financial Services LLC. Tax-exempt charitable organizations can sell donations of appreciated assets without having to pay capital-gains taxes on the profits.
"What's better than giving and receiving at the same time?" asks Laurent.
3. Maximize workplace retire plans to create your optimal benefits. If you have a 401(k) or similar retirement plan through work, it's a good time to take a look at how much you've contributed this year. You may still have time to bump up your salary deferral to ensure that you put away the maximum allowable amount for 2018, which is $18,500. The catch-up contribution limit for employees over age 50 is $6,000.
Some investors may want to convert a traditional individual retirement account or 401(k) plan into a Roth IRA. There is no upfront tax deduction for Roth IRA contributions, but qualified distributions are tax-free. Roth IRAs generally make sense for investors who expect to be in a higher tax bracket after they begin taking distributions.
"Low-income years can be a great opportunity to convert IRA balances to a Roth," said Laurent Carrier. "You can potentially pay a lower tax rate on the conversion than you would during a high-income year, and the account grows tax free and doesn't have future required minimum distributions," he added.
About Laurent Carrier and Carrier Financial Services LLC
Laurent Carrier is the owner and founder of Carrier Financial Services LLC. For over 40 years, his mission has been to provide honest, simple financial advice to his clients. As a well-respected community leader, Laurent has served on the board of the American Red Cross and is now on the Advisory Board with the Colorado College Summer Music Festival. He is enthusiastic about supporting non-profit educational organizations locally, nationally, and internationally.