Year-End Financial & Tax Planning

By Kathie Miller, GHI Corporate Director of Marketing & Communications

istock.com/juststock

Tis the Season for Tax Tips

Hard to believe we’re reaching the end of the calendar year, which means we’re all getting ready for special time with family over the holidays, maybe some travel, definitely some feasts and fun. But are we also getting ready for the end of the tax year?

Yes, I realize most of us would rather browse the web for travel deals or new twists on side dish recipes to liven up our feasts. But with two months remaining in this calendar year, you might also find some time to check your tax prep list… maybe even check it twice (I hear that’s a thing).

I started to research tax tips for a blog post and decided to reach out to a personal finance expert for some guidance. Scott Hughes is Managing Partner & Financial Advisor at Hughes Financial Services, a family-run business based in Herndon, Virginia. A CFP® (Certified Financial Planner), Scott has worked as a financial advisor since 1994. Many of his clients are employees and retirees from various local governments, public school systems and non-profit organizations. I sent Scott some questions, and he took the time to prepare the following for me to share with you, our wonderful readers of The Good Life.

Tax Issues to Consider Before the End of the Year

Q&A with Scott Hughes, CFP®, MBA

Scott Hughes (photo courtesy of Hughes Financial Services)

One of our primary roles as a holistic financial advisor is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component necessary to help our clients benefit from potential tax reduction strategies.

As a financial planner, do you have basic, standard tips you offer to clients about their taxes?

Yes, we have a common set of considerations and tips we offer our clients either towards the latter part of the tax year and/or prior to filing their taxes. For example, we will review the following:

  • Have you made an IRA contribution for the current tax year?
  • Has your income or other financial circumstances changed significantly since last year?
  • Are you over the age of 70-1/2, or are you taking a Required Minimum Distribution (RMD)?

Regarding the 2019 tax year, are there any changes you think might have an impact on the tax situation specifically for people who are already in retirement?

Thankfully no. Some experts believe 2018 was the biggest change in personal tax law in 30 years. In general, while there are no noteworthy changes in the federal tax law for 2019, the IRS did make corrections to the employer-withholding tables which more accurately implement the Tax Cuts and Jobs Acts tax rates and tables. Taxpayers should check with their employers to ensure the proper withholdings were being made in 2019.

For those already in retirement:

  • If you have investments in a taxable account that may be subject to end-of-year capital gain distributions, you will want to consider strategies such as tax gain or loss harvesting.
  • If you have inherited an IRA or 401(k) from someone who passed away last year (and there are multiple beneficiaries), you should consider splitting the account before the end of the year. This maneuver will help to avoid calculating the RMD based on the age of the oldest beneficiary.
  • Using your RMD to make a Qualified Charitable Distribution (QCD) can be counted towards satisfying your required minimum distribution. There are specific rules that must be applied and it’s always advisable to consult with a tax or financial expert before doing so to avoid penalties.

With these changes in mind, are there any steps you recommend people take before the end of the calendar year to account for the tax impact?

When accounting for the impact of the Tax Cuts & Jobs Act, it’s always advisable to consider the following end-of-year steps:

  • Consider making contributions to your employer-sponsored retirement account (401k, etc.) and/or an Individual Retirement Account (IRA).
  • Complete a basic tax projection to ensure you have withheld an appropriate amount based on your income.
  • Review your portfolio holdings to see if any of investments are currently trading at a loss. If so, you may consider selling the investment and claiming the loss against your income. Some qualifications apply and it’s always advisable to consult with a financial advisor.
  • If you are saving for future college expenses for children or grandchildren, you should consider investing in their state 529 Plan. Many states, including Virginia, provide a state income tax deduction for 529 Plan contributions (limits apply).

People often work with both a professional tax preparer and a financial advisor; as the financial advisor, what can you do to help someone manage their investments in tax-smart ways?

Professional tax preparers are generally exceptional at “running the numbers” and preparing your tax returns whereas a financial advisor can consider the bigger picture of your plans, goals and anticipated changes in your financial situation. For example, a financial advisor will take those numbers and consider strategies that will work towards reaching those life goals while specifically minimizing your tax liabilities and taking advantage of investment growth opportunities. As financial advisors, we always welcome the opportunity to work with our clients’ tax preparers to provide them with the best solutions for their situations.

Do you have any other tips or suggestion for people as we approach the end the year?

As we approach the end of the year, there are always ways taxpayers can maximize their tax planning.

  • If you turned age 70½ during 2019, you still have until April 1, 2020, to take out your first RMD. This is a one-time opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31st of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out.
  • Be careful if you inherit a retirement account from a loved one. In many cases, a decedent’s largest asset in their estate is a retirement account. Tax laws for inherited retirement accounts are very complicated, and you must carefully adhere to the requirements to avoid any unnecessary income taxes and penalties. Contact us before receiving any distributions from a retirement account you inherit because they will be 100% taxable upon receipt. Remember – it’s easier to avoid a problem than it is to solve one!
  • It is very important to take the RMD from an inherited IRA each year as penalties for not doing so are very severe – 50% of the amount you did not take
  • Child and Dependent Care Credit for Summer: Many parents claim the child/dependent care credit each year to help cover the costs of after-school daycare while working yet overlook claiming childcare costs during the summer. The key for this deduction is that the camp can only be a day camp, not an overnight camp. For a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35% of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.
  • Medical Expense Deduction: The threshold amount for medical expense deductions returns to 10% of your adjusted gross income for any individual taxpayer regardless of age.

From an overall planning perspective, it’s always important to review your Estate Planning documents and family dynamics regularly. If any aspects of your life circumstances have changed or your Estate Planning documents (Will, Power of Attorney, Living Will, etc.) are more that 3-5 years old, it would be prudent to revisit these documents to ensure they are up-to-date and reflective of your current wishes if you are unable to make them yourself or have passed on.

There are many year-end tax moves focusing on income and expenses that you can make to lower your tax liability. Year-end tax planning often focuses on determining whether 2019 or 2020 is the best year to earn additional income or incur more tax deductions – it can make a difference for many investors. Now is the time to focus on how to optimize your situation between these two years.

About Hughes Financial Services, LLC:

Hughes Financial Services, LLC, is an independent Registered Investment Advisor located in Herndon, Virginia (Fairfax County). We provide clients with personally tailored and unbiased investment advice on building, managing and distributing their financial assets. Our advisors work with individuals, couples and families in or nearing retirement. Investment management, tax planning, estate planning, retirement and income planning, and education planning form the foundation of our services and we specialize in helping military families and employees of local government and school systems with their retirement options. Please note that individual situations can vary. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

—————–

As Corporate Director of Marketing & Communications, Kathie Miller provides strategic guidance and tactical support for all areas of the GHI organization. As part of her responsibilities, she manages The Good Life blog and newsletter. Kathie joined GHI in 2014 after nearly 15 years at NPR, where she honed her skills in brand and reputation management, content marketing and internal communications. Originally from Pennsylvania, Kathie has slowly come to realize she’s lived in Arlington for more than half her life and should call herself a Virginian. She enjoys the outdoors and brings her rescue dog, Remi, to work every day.