It’s the end of the year, and, like most of us, your to-do list is a mile long. Your family or friends may be arriving for holiday visits, so there’s cleaning and cooking to do. You have gifts to buy. You have holiday parties and school functions to attend. The last thing on your mind is your finances. Still, they deserve a good look before the close of the year.
Year-end is a popular time for charitable giving. The type of gift (appreciated stock or cash from a brokerage account, contributions of appreciated stock to a donor-advised fund, cash gift from an IRA, etc.) should be carefully considered in the context of your overall tax situation. Tax law changes at the end of 2017 add to the importance of a well-thought-out annual charitable giving plan. For example, the standard deduction was doubled (in 2019, $24,400 for a couple filing jointly or $27,000 for a couple both over age 65), so if available Schedule A deductions do not exceed the higher standard amount, charitable gifts are effectively not tax deductible. The following are tax-efficient charitable gifting options for those taking the standard deduction.
- Qualified charitable distribution (QCD): If you’re over 70 ½ and taking a required minimum distribution (RMD), charitable gifts made directly from an IRA reduce taxable IRA distributions dollar for dollar. A charitable gift from an IRA is called a QCD. These types of gifts were made a permanent part of the tax code in early 2016. Another benefit of the QCD is the possibility of reducing Medicare Parts B and D premiums, which are determined by modified adjusted gross income (MAGI = AGI + tax-exempt interest). This year, there are five tiers of MAGI that determine Medicare Parts B and D premiums. A QCD reduces MAGI, so charitable gifts made through an IRA could lower income enough to drop into a lower MAGI tier, thereby reducing Medicare Parts B and D premiums.
- Donor-advised funds (DAF): Grouping several years of charitable giving into one year (often called front-loading) allows gifts to be itemized along with other available Schedule A deductions. Appreciated stock that is overweighted in a taxable portfolio can be reduced by gifting shares to a DAF. No tax is realized upon the transfer. In subsequent years after the DAF is funded, gifts are made from the DAF rather than from a brokerage account. Structuring a charitable giving plan to incorporate a DAF allows a client to time contributions in years to achieve the greatest tax benefit while maintaining the same level of annual gifting.
Make sure to read our related blog post Tax Implications of Charitable Giving and download our whitepaper Four Strategies to Help Maximize Charitable Deduction Contributions.
Retirement plan contributions
Don’t forget your retirement plan! You have options, depending upon the type of plan you have.
- 401(k)/403(b)/defined contribution plans: If the contribution amount was lowered at any point during the year, revisit to ensure contributions are sufficient to receive the maximum company match. The limit this year for employee contributions increased by $500 to $19,000. If you’re over age 50, a step-up of an additional $6,000 is available. We advise clients to maximize contributions to a retirement plan to the extent cash flow allows. These contributions are typically pretax, serving to lower taxable income during working years. Contributions also compound more quickly than a similarly invested taxable portfolio.
- IRA contributions: The IRA contribution limit also increased this year to $6,000. If you’ll be 50 or older this year, a catch-up contribution of an additional $1,000 is available for a total limit of $7,000. While the annual contribution limit is the same for all IRAs, the tax treatment isn’t. Speak to your advisor before making an IRA contribution to ensure the most tax-efficient approach, which can change from year to year. For example, if your AGI is larger than $193,000 (married filing jointly) or $122,000 (single), then a direct contribution to a Roth IRA may be reduced or prohibited. If you’ve contributed to a Roth in the past, revisit any changes this year that may push your income over the threshold for a direct contribution.
Capital gain/loss harvesting
Parsec strives to manage portfolios in a tax-efficient manner. Portfolio managers harvest losses to offset capital gains realized throughout the year. If you have outside assets that have realized gains this year, reach out to your advisor to discuss possible additional year-end loss harvesting. Allso, read our recent blog post (Tax loss) Harvest Season is Almost Here!
Health savings account (HSA)
Contributions to an HSA are pretax if made through payroll deductions. If contributions are made with after-tax dollars, an “adjustment to income” deduction is taken, which serves to lower adjusted gross income. In addition, withdrawals are not taxed if used for qualifying medical expenses. And don’t forget — HSA account balances roll over from year to year, unlike their FSA counterpart. Given the tax-preferred treatment of HSAs, we recommend maximizing annual contributions if an HSA is available with your medical plan. For 2019, contributions can be made up to $3,500 for individual coverage and $7,000 for family coverage. For those over 55, an additional $1,000 can be added as a “catch-up” to these limits.
Medicare Part D review
Changes can be made to an existing plan during open enrollment, which runs from October 15 to December 7. If you’ve experienced an increase in your monthly drug costs, we recommend reviewing your Part D coverage here: www.medicare.gov/drug-coverage-part-d. Formularies (drugs covered by a plan) may change from year to year. A review and comparison with other plans could uncover substantial savings. Related, read our in-depth Medicare article in our Q4 newsletter (starts on p10).
Annual exclusion gifts
Gifts up to $15,000 can be made to an unlimited number of individuals this year. These annual gifts do not count toward the applicable lifetime gift-tax exclusion amount, which is why they’re often called ‘annual exclusion gifts.’ Gifts made each year can reduce a taxable estate over time. All future growth on these gifts is outside of the taxable estate.
Consider additional savings to your children’s 529 plans at year-end. Parent-owned 529 plans can also receive contributions from grandparents.
Overwhelmed? While we cannot help you with the cooking, cleaning and gift buying, we can help with your financial to-do list. Give your advisor a call. Let us make sure you tackle any items on the list that apply to your unique situation.