Year End Tax Planning Strategies

Today’s guest post is by Anjali Jariwala, a tax and personal finance advisor at FIT Advisors. She is a sponsor of this site (this is not a paid post) and I have appreciated getting to know her over the last few months. Below she discusses some of the easily forgotten tax planning strategies from Roth conversions to donor advised funds. Take a look and let us know what you think in the comments section….

Take it away Anjali. 

Year End Tax Planning Strategies

The end of the year is approaching and you may be asking yourself should I be doing something?  The short answer is…YES! Below is a list of simple yet easily forgotten techniques you can implement before the end of the year.

In service Roth conversions

Many retirement plans – 401(k)s, 403(b)s and government 457 – have the option for the participant to make pre-tax or post-tax contributions.  The post-tax contributions fund a Roth 401(k) that can be rolled into a Roth IRA when you leave your employer.

Since post tax dollars are contributed into a Roth, those funds grow tax free. When you withdraw the funds, no more taxes are due.  If you are able to make post-tax contributions, check whether your plan allows for in service Roth conversions.  If so, you are able to convert pre-tax money into Roth money.  The amount converted is taxable but not subject to a 10% early withdrawal penalty.

Why would I do this?

The reason is because of the Alternative Minimum Tax or “AMT.”  The AMT essentially forces a taxpayer into a 26% or 28% tax bracket.  The IRS created the AMT to force high income taxpayers to pay at least a certain minimum amount.  Unfortunately, it did not keep up with inflation so many middle class taxpayers find themselves paying AMT.  If you are near this tax bracket and have a large amount of itemized deductions, there is a good chance you will be subject to the AMT.

Oh no…I am paying AMT tax now what?

At this point I recommend looking to your tax advisor for assistance.  The advisor can figure out how much income needs to be generated in order for your ordinary income to equal your AMT income.  You can then convert that amount of income into Roth money.  You now created tax free money and your tax burden has stayed the same.

If your retirement plan does not have this option, the same strategy could work with an IRA rollover account.  Work with your tax advisor to determine how best to approach this.

(ed. Our company allows for conversions from traditional 401k to a Roth 401k. It is best to think about when to do these, as the converted dollars are taxed at your regular income level. If for instance, you will be able to have your taxable income go below the AMT, then converting from a traditional to Roth account makes sense.

I am a high earner and will likely pay taxes higher than the AMT. So for me, I keep pumping money into my traditional 401K for now and will likely start Roth conversions when I go part time in the future, reducing my earned income and tax brackets. )

2018 Limitation Increases

The IRS increased the amount that an employee can contribute into their 401(k) plan from 2017.  The limit has gone up from $18,000 in 2017 to $18,500 for 2018.  Most individuals set up an automatic contribution plan based on percentage of income or a fixed dollar amount.  Toward the end of the year, it is good to look at your elections to make sure they are set up to hit the max for 2018.

The IRS increased the limits on Health Savings Account (“HSA”) contributions as well – $3,450 for an individual and $6,900 for a family.  Similarly to a 401(k), review how your contributions are set up and make sure you are going to hit the max.

One item to note is that HSA limits include both your employer and employee contributions (the total amount).  For example, if your employer is putting $2,000 into your family HSA for 2018, then you can contribute $4,900 to reach the max of $6,900 for the year.

(ed. This is good advice. I had not realized the limit increase and was unlikely to check how I was determining my contribution amount. I.e. what percentage of my income is being deferred). 

529 College Education Accounts

Many people are familiar with 529 accounts and utilizing these for their children’s education.  The benefit of a 529 plan is that contributions grow tax free and if funds are used for qualified education expenses, there are no tax implications when you pull the money out.

Did you know you can use 529 plans for your own education such as medical school or other graduate school?  Certain states provide a state income tax benefit if you contribute to the state’s 529 plan.

If you are attending graduate school/medical school, you may be able to fund a 529 plan with your loan proceeds.  Once in the account, you can remit the tuition payment back to the school through the 529.  Since you contributed to the plan, you can take advantage of the state income tax deduction without having to fund the 529 with your personal funds.

One item to note is that certain 529 plans may require you to keep funds in the account for a certain period before you can distribute it out.  It is good to review the rules to make sure this works for your unique situation.

(ed. I did not know that you can contribute into your 529 and then use it for further education expenses. This is good advice for any MDs planning on getting a MBA soon. Put the tuition money in a 529 and let it grow for a few years, then when you are ready to enroll in school start drawing on the money.)

Donor Advised Fund

A great tax benefit is being able to deduct (as an itemized deduction) charitable contributions.  But did you know you can superfund your charitable donations for a number of years but receive an immediate tax benefit?

This technique can be done through a donor advised fund (“DAF”).  What is a DAF?  It is essentially a pool of money that can be used to make donations to any 501(c)(3).  The benefit of a DAF is that you can make a large donation into the DAF in the current year and receive a tax deduction in the same year.  However, you can take your time distributing the funds to various charitable organizations.

What happens if you pass away before the funds are fully donated?  You can list a beneficiary for your DAF so that the charitable giving may continue.

Do I have to contribute cash to the DAF?  The added benefit of a DAF is that you can donate appreciated securities – stocks, mutual funds, etc.  If you have stock that has gone up in value significantly and are charitably inclined, you can donate that stock into a donor advised fund.

For example, let’s say you purchased 100 shares of Apple stock many years ago for $50/share.  The value of that investment is now $16,000.  If you donate the Apple stock to a DAF, you receive a tax deduction for $16,000 and avoid the capital gain of $11,000 which you would have recognized if you sold the stock.  The only item to note is that you may be limited on your charitable donations and itemized deductions so it is important to consult with your tax advisor to ensure you receive the full benefit.

(ed. I am a huge fan of the DAF since learning about it from Physician on Fire. He actually has a nice article about how to set one up here. It is a great way to decrease capital gains that you have earned, obtain a tax write off for donations, and give back to various charities over the next 2 to 20 years).

Final notes

So there you have it. Some great advice on how to improve your year end tax planning by Anjali. If you are interested in talking to her about further tax advice, then reach out to her here. It is hard to believe 2017 is coming to an end but I am sure 2018 will rock.

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I am a Dad and Doctor trying to make sure I am living life in the best way possible. Whether it is having my finances together, being a great parent, or balancing my home life with work, I am here to kick a$$ and help you do the same.

3 thoughts on “Year End Tax Planning Strategies

  • December 2, 2017 at 10:10 am

    Nice and simple, great post. The Roth conversion in future lower income years is helpful, as is the DAF. I wonder what the DAF implications are with the new tax bill. With the standard deduction being higher, it make take a lot of contribution to claim a DAF deduction in years going forward. I might give some appreciated shares this year to my DAF.

    • December 2, 2017 at 1:17 pm

      It will be interesting to see what makes it through finally. I suspect we will all be trying to figure it out but few of us will save a ton.

    • December 2, 2017 at 1:32 pm

      That is a good point on the DAF. The other implication to keep in mind with the tax bills (Senate just passed their version this morning) is that both versions repeal the state income tax deduction, Senate Bill caps the property tax deduction and the House Bill limits mortgage interest deduction. For those who live in high income tax states, these provisions will significantly reduce the amount that can be taken as an itemized deduction. For the DAF, keep in mind that itemized deductions currently have a limitation if income is above a certain threshold so good idea to have your CPA run a projection to ensure you are getting the full benefit of the contribution. Finally, for those in high income tax states that owe estimated tax payments or may owe April 15th, if the bill goes through it would be a good idea to pre-pay your state income tax by the end of this year so you preserve your state income tax deduction for 2017.


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