If ever there is a time to speak with your fiduciary financial advisor and CPA, it is at the end of the year. This fact is especially true if there has been a change in your financial situation. As the year wraps up, it is wise to have that end-of-year conversation with your financial advisor as good tax planning will allow you to comply with tax laws while aligning yourself to minimize your burden.
Here are some general tax areas to discuss with your fiduciary financial advisor and CPA regarding your tax situation at year-end.
Did You Have a Change in Income?
Has your income gone down, stayed the same, or increased? Based on your answer, you may need to adjust your estimated tax payments and tax withholdings. You may need to make additional quarterly payments if you owe more in taxes this year than the previous year, or you may risk a penalty for not paying enough in taxes unless you are within the “safe harbor” amount. You will also want to discuss what this change in income may mean for your emergency fund.
Did You Have Any Large Stock Sales?
If you’ve sold large amounts of stock or rebalanced your taxable accounts, keeping an eye on your tax obligations is essential. For example, an inherited investment account that you may receive tax-free will have tax on subsequent sales. It’s wise to look at taxable gains before the end of the year and consider harvesting losses to offset those gains.
Did you Inherit any Money this Year?
While the initial bequest amount is usually free of tax liability, subsequent sales are taxed. It’s also wise to know that regulations can vary tremendously if you are named as a beneficiary on an annuity, retirement plan, or IRA. Remember that if you inherit a Roth IRA, you typically must spend down the account within ten years. Accounts inherited before the year 2020 can still use the stretch IRA plan.
Did You Buy, Sell, Or Refinance a Home?
For a married couple, profits from the sale of a home are generally tax-free, up to $500,000, but there are stipulations, so it’s wise to confirm that you qualify. Also, if you paid off your mortgage that had points that you were deducting year to year, you may deduct the balance remaining this year. Additionally, it is possible to generate amortization of points if you refinanced your mortgage.
Thinking About Making a Charitable Donation?
Discuss any charitable donations with your CPA and fiduciary financial advisor to ensure you take advantage of all available tax breaks and avoid potential penalties. An example of such a strategy would be donating appreciated securities rather than writing out a check. You may also save money by transferring an RMD to a qualified charity, thus avoiding taxes on the withdrawal. It should be noted that you can make these transfers directly after age 70.5, but RMDs begin at age 72. This action would result in a reduced taxable income. YOu should also be aware that the maximum donation amount is $100,000, and you would not qualify for a charitable deduction when you file your income taxes. That said, it is typically beneficial to contribute directly to the charity rather than to take the deduction.
Did you Recently Get Married or Divorced?
If you got married this year, remember how tax rates will increase for a dual-earner couple. Additionally, if one spouse of a newly married couple is unemployed, the jobless spouse can fund an IRA if the other spouse is working. Concerning a divorce, beginning in 2019, alimony is no longer deductible for the payor nor seen as income for the recipient, and divorce settlements must reflect this. It is also wise to review who can deduct dependents.
Are you the Parent of a College Student or a Recent Grad
The American Opportunity Tax Credit allows parents of college students a tax break of up to $2,500 of tuition per student for the initial four years of university.
Have you Recently Retired?
It is wise to discuss managing your tax bracket with your CPA and your fiduciary financial advisor so you may remain within or use up as much of your current tax bracket as possible. An example of such a strategy includes maxing out pretax retirement accounts. Also, take withdrawals from qualified accounts to convert pretax funds to after-tax funds, possibly at a lower rate.
Have that end-of-year conversation with your financial advisor before year end to ensure you are taking advantage of all the potential opportunities and dodging pitfalls in your financial plan.
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Farther-FamilyVest is your Fiduciary Financial Advisor in Destin and 30A.