Year-End Tax Planning Considerations

Nov 29, 2018

With the holidays upon us, now is the time to start thinking about year-end tax planning strategies. While tax reform may result in a lower overall tax bill for many, there are simple steps that could further reduce tax burdens. Below, we highlight some important strategies that are worth looking into.

Considerations for those still working:

  • Maximize your retirement plan contributions by year-end. Not only does this help make you better prepared for retirement, it may also help to reduce this year’s tax bill and will set you up for tax-deferred growth over your investment time horizon.

    If you are not on pace to maximize your contributions by year-end, consider increasing your deferral rate to direct extra dollars to your retirement account during the last few remaining pay periods. The maximum contribution into a 401(k) in 2018 is $18,500 for individuals under 50 and is $24,500 for people age 50 and over.

  • Maximize Traditional IRA/Roth IRA contributions by 04/01/2019. Roth IRAs grow tax-free and are not subject to mandatory distribution rules (Required Minimum Distributions), making them great for both retirement planning and multi-generational planning.

    Contributions to a Traditional IRA can be tax-deductible in the year that you make them (depending on your income), so maximizing IRA contributions, in addition to 401(k)/retirement plan contributions, can be another great way to reduce your taxes for the year. The maximum contribution into an IRA in 2018 is $5,500 for individuals under 50 and $6,500 for people age 50 and over.

  • Explore other ways to contribute to tax-advantaged accounts. These include cash balance plans, spousal IRAs, non-deductible IRA contributions, and “back-door” Roth IRA contributions.

Considerations for retirees:

  • Take Required Minimum Distributions (RMDs) by year-end to avoid a 50% IRS penalty. RMD tax rules apply to Traditional, Rollover, and Inherited IRAs.

  • Consider an IRA Qualified Charitable Distribution (QCD) to fulfill RMDs and charitable goals. IRA owners wishing to lower their adjusted gross income can use QCDs as a strategy to disperse money to charities of their choice tax-free.

    Given that fewer people will likely itemize deductions under the new tax law due to the higher Standard Deduction, a QCD is an effective way to give money to charity for those over 70½ and still receive a tax benefit.

Considerations for everybody:

  • Review your tax situation with your accountant and take advantage of tax-loss selling opportunities to mitigate potential capital gains taxes.

  • For individuals with highly-concentrated and highly appreciated stock positions, consider a plan to sell some shares prior to year-end. Then, sell additional shares in early 2019.

    This can help spread the tax liability across multiple tax years, potentially dampening the tax impact. Further, because taxes for most people may be lower as a result of tax reform, now could be a good time to unwind certain stock-specific risks.

  • Make charitable gifts before year-end. This will help fulfill charitable desires and could reduce your taxes. Highly appreciated and/or concentrated stocks can be a good source for gifts.

    Rather than selling stock and realizing capital gains, consider donating directly to a charity. By gifting appreciated stock directly to charity, you avoid realizing imbedded gains yourself and generate tax savings (even if you do not itemize deductions and receive a tax deduction for the gift).

  • Contribute to 529 College Savings Plans for your children, grandchildren, or others. In addition to the tax-deferred growth within the account, many states offer a full or partial tax deduction or 529 Plan contribution credit.

  • Consider making annual exclusion gifts (up to $15,000 per spouse, per beneficiary, per year) to help you achieve multi-generational gifting goals and reduce the overall value of your estate.

  • Explore if it makes sense to convert all or a portion of your IRA to a Roth IRA, particularly if you expect 2018 to be a low income year. Converting an IRA to a Roth IRA is a taxable event, meaning you may pay taxes on the amount converted.

    However, Roth IRAs are not subject to RMDs (for the owner) and have the ability to grow tax-free, which is a beneficial factor when considering tax planning.

When it comes to developing a comprehensive financial plan, tax planning is just one piece. In our financial planning magazine, Prosper, you'll find valuable tools and insights on topics ranging from preparing for retirement and estate planning to tax planning and investments.

Get your copy »

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.

Want regular insights into financial planning and investing-related topics?



Sign up to receive the latest financial planning and investment tips and news.

View all Preferences