Fall Has Arrived and So Has Tax Planning Season

October 2nd, 2019 by Jim Allen

Now that summer is over, people’s thoughts turn to cooler fall weather and the impending holiday season. Fall is also the time to start thinking about any year-end tax planning opportunities. At Anchor Bay Capital, we place a heavy emphasis on tax planning as part of our comprehensive financial life planning approach. We are always looking for ways for you to keep more of your hard earned money, whether that is saving on investment fees or saving on taxes. Because, “it’s not what you make, but what you keep” that is most important.
Listed below are a couple of tax savings opportunities that can be evaluated before the end of the year:

• Roth IRA Conversions – Tax diversification is an important part of any financial plan and the Roth IRA is great way to diversify the tax treatment of your investments. Unlike the traditional IRA where you normally get a tax-deduction for the contribution, Roth IRA contributions are made with after-tax money. But, when qualified distributions are made from a Roth IRA, they are income tax free. Whereas traditional IRAs don’t tax the contribution but do tax the distribution (not taxing the seed but taxing the fruit), Roth IRAs tax the seed but not the fruit. Since nobody truly knows what tax brackets will be in the future, it is smart planning to have some funds in both types of accounts. The trick however is how to get funds into a Roth IRA and that is where conversions come in.

A Roth conversion entails taking part of your traditional IRA and converting it to a Roth IRA. This means that you will pay tax on the conversion. However, it also means that if distributions from the Roth are made after 5 years and age 59 ½, they will be income tax free. So the strategy with a Roth IRA conversion is to convert just enough so that you stay in the same tax bracket – which requires careful planning and some income tax projections. Doing conversions to a Roth IRA may not always make sense, but we always evaluate the opportunity as part of our process.

• Charitable Gifts – If you typically make donations or gifts to your church, school or other charities, there are several options available that may save you taxes. First is evaluating whether you should “double up” your charitable gifts to every other year. With the enactment of the 2017 Tax Act, many people will now use the standard deduction instead of itemizing as the standard deduction was almost doubled. This means that you may not be taking your charitable donations as an itemized deduction each year. But, if we can plan the donations so that you have more in one tax year and none in the following year, it may allow you to take advantage of the charitable deduction. So lumping together or “doubling up” on your donations every other year may at least allow you to itemize every other year. Again, detailed projections need to be made to see if this strategy works for your situation.

If you are making charitable donations and are over 70 ½, you have the opportunity to use the “charitable IRA” strategy. This strategy allows you to transfer up to $100,000 from your IRA to a public charity each year without paying tax on the transfer. You must be over 70 ½ and this transfer is tax neutral. While you do not have to pay tax on the transfer, you also do not get a charitable deduction. The charitable IRA strategy can be very effective for someone who is forced to take their required minimum distribution and does not need the money and is already making charitable gifts. You can use the charitable IRA to make a donation of your required distribution without tax consequence.
Finally, we are always evaluating what you should give to charity. Most people just make cash gifts, but if you have appreciated assets like a stock or mutual fund, that may be a better choice for giving to charity. Since charities are tax exempt, they can sell that stock or mutual fund and not have to pay the capital gains tax that you would incur if you sold the mutual fund and then donated the cash.

As mentioned before, a major aspect of our planning approach is to always look for tax savings opportunities. There are still three months left in the year to identify these and get them implemented. If you would like a complementary income tax review, please contact us to schedule your appointment.