Date: December 21, 2016

Top Financial Tips to Year-End

This year-end is a very unusual one. Not only will the presidency be changing in early 2017,  but Congress will now join the party in power for the first time since the 2008 election and 111th Congress. That means for the most part, any legislation that passes Congress will likely be signed into law by the president. Before you dismiss this as a political post, read on.

Because Speaker of the House, Paul Ryan, has been in power for several years, we already know his economic plan, which just so happens to line up with Donald Trump’s plan. Besides the lifting of hundreds of regulations and repatriation of corporate cash overseas, the cutting of corporate and individual taxes will likely be number one for the 115th Congress.

It’s very rare for a party to sweep into power and have lower taxes as their top priority. With individual tax brackets likely to be reduced to three with the rates cut for most Americans, there are a number of unique year-end financial tips to be aware of as there is a strong likelihood that our tax bills will be lower for income earned in 2017 than 2016. It’s also possible that the IRS sees an unexpected decline in tax revenue for Q4 which could temporarily increase the budget deficit.

With all that in mind, it makes sense to:

  • Defer as much income as you legally can from 2016 into 2017. If tax rates are cut, you will owe less money. If they somehow are not, there shouldn’t be any harm.
  • Accelerate deductible expenses to year-end. Since taxes will likely be lower in 2017, you are better off taking your expenses in 2016 against the presumably higher tax rate. The deduction is worth more now.
  • Increase retirement plan contributions. This applies to company sponsored plans like a 401K or 403B since IRA contributions may be made right up until April 17, 2017 for the tax year 2016. If you haven’t maxed out your contribution for 2016 ($18,000), your company may allow you to do a one time or two time increase from your paycheck into your account to lower your reported income to the IRS for 2016. If you earn a year-end bonus, consider adding that into your retirement plan as long as you haven’t maxed out. And remember, for those age 50 an over, you can contribute an additional $6000 as a “catch up provision”.
  • Increase charitable contributions. Similar to the ones already mentioned, why not give more to charity in 2016 and deduct a larger amount against a presumably higher tax rate in 2016. Not only that, but on a humanistic level, it’s very worthwhile.
  • Realize net investment losses of $3000. The IRS allows each filer to deduct up to $3000 in net capital losses. That means if you have taken $10,000 in gains, you can take $13,000 in losses and write off the net of $3000 against your adjusted gross income. Any amount more than $3000 net in a given year is carried forward in future tax years.
  • Harvest tax losses. This is one of my favorite strategies year after year. If you have securities held at a loss, you are able to sell them and buy a similar but not essentially the same security to realize the tax loss. For example, if you owned American Airlines at a loss and you still believed the airlines were still a good investment, you could buy United, Delta, JetBlue or Southwest. You could also buy an exchange traded fund (ETF) which invests only in the airline space, like JETS. You couldn’t, however, sell the Vanguard 500 mutual fund and buy one of the ETFs which tracks the S&P 500, like SPY and IVV.
  • Required Minimum Distributions (RMDs). If you are 70 1/2 or own an inherited IRA, the government mandates that you take an annual distribution from your IRA, 401K, 403B, etc. This is not optional. Failure to do so results in penalties of 50% of the distributed amount.

I am sure there are other worthwhile tips, but these are a good start and ones I feel strongly about.

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Paul Schatz, President, Heritage Capital