Year-End Tax Opportunities

Each year, U.S. taxpayers face several year-end deadlines which, if ignored, can be costly and in some cases punitive. In the latter category, consider people over age 70 1/2 who fail to take the full required minimum distribution from their IRA or 401(k). If they get the calculation wrong, or forget the distribution altogether before December 31, they face a 50% penalty on the amount they should have taken.

A best practice is to sit down weeks before the deadline and consider which parts of your portfolio you want to scale back, or what you would need to sell in order to rebalance your asset allocations back to their targeted percentages. If you don’t need some or all of the distribution, which is not uncommon, you don’t have to spend it; you can reinvest extra money in a taxable portfolio.

Of course, the tax year also ends December 31, which means if you have unrealized losses in your portfolio, you need to realize them before the end of the year. “Realizing,” in this case, means selling for a loss, and buying a similar replacement asset in your portfolio. You book the losses and use them to offset an equivalent amount of capital gains or up to $3,000 of ordinary income. If this is a low-income year, you might consider taking advantage of the 0% tax bracket for long-term capital gains, which is below $38,600 for single taxpayers or $77,200 for joint filers. This allow you to harvest some gains from your portfolio. But remember, if you’re looking to offset your harvested losses, many mutual funds will be distributing capital gains in December.

If you want to get a tax deduction for charitable contributions for 2018, then the charitable contribution needs to be made before December 31. The challenge here is that the deduction is only available to people who itemize their deductions, and the new, higher standard deduction means that many people won’t be itemizing. To get above the threshold, some people are bunching many years’ worth of charitable contributions into a single year, by utilizing a donor-advised fund. This approach raises the total contribution amount in that year high enough, so the donation becomes deductible again. You can find more details on this in an article we previously published here on Charitable Gifting.

If you need help evaluating your options, you should review with your accountant or with us here at Kendall Capital.