Year End Tax Tips and Reminders

by John Cooney on Dec 12, 2017

Taxes, IRA, Roth IRA

As we move into the holiday season and with the end of the year fast approaching, it is always good to take some time out and make sure you are doing some year-end planning with regard to taxes.  Regardless of your personal situation, there may be some small steps you can take (or have to take) to stay in compliance with the IRS or to take advantage of the tax laws to avoid a bad situation come April 15th.


IRS Requirements

Required Minimum Distributions – Are you over 70 1/2?  If so and if you have money in a tax deferred account (such as a 401K or a traditional IRA), the IRS requires you to begin taking distributions from that account by April 1st, in the year following the year you turn 70 ½.  Why does the IRS require these distributions? Well, you can only avoid the tax-man for so long, and in the case of tax-deferred retirement accounts, so-long equals 70 ½.  Since these accounts were tax deferred, the IRS mandates that you start taking withdrawals, those withdrawals are then reported as part of your income for the year, and you would pay income tax on those distributions based on your current tax bracket.  How do you know how much you need to withdraw?  You can start by talking with the custodian who holds your account; most will assist you with calculating your RMD.  You can also utilize worksheets provided by the IRS here.  It is your responsibility to make sure the distribution is made and for at least the minimum amount.  The IRS can assess a penalty of up to 50% on the amount under distributed, so skipping the distribution can be an expensive mistake.

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Looking to Lower Your Tax Liability

Did you earn a higher than expected income this year and are worried about your tax hit?  There are a couple moves you can make to try and lower your taxable income and stay within the guidelines of the IRS.  First, check your investments to see if you had any losses this year that you can sell and deduct the losses against any capital gains and or against your income for the year.   A second way to lower taxable income is through charitable giving.  Your donation doesn’t need to be limited to cash either, if you have securities that have appreciated, you may be at an advantage by donating the securities directly, reducing your exposure to capital gains taxes.  A third way to reduce your tax liability if you own a home is by making your January mortgage payment in December.  Since the payment due January 1st is for interest accrued in December, you can get credit for the early payment, and the interest on the payment will be deductible when you file taxes.


Taking Advantage of a Lower Income Year

There can be many instances where the income you earn for the year is lower than it has been in the past or expected to be in the future.  This can be a great opportunity for anyone with a tax-deferred account to consider converting those funds into a Roth IRA.  When you convert money from a tax deferred account such as a traditional IRA or 401K into a tax advantaged account like a Roth IRA, you are responsible to pay income taxes on the total amount you convert.  You are going to pay these taxes at some point, so if you have a year, where your income is not at a level that you are normally at or expect to be in the future, you may want to look at converting part or all of the tax deferred money into the Roth, and paying those income taxes at the lower rate, based on your low income year.


These are some generic tips and advice, to truly give tax planning advice, I would need to see your full financial picture, but at the very least these should give you topics to explore with your financial advisor or accountant and make April 15th less of a headache for you and your family.