Bill Sweet’s Year End Checklist

Tax-planning expert and certified financial planner Bill Sweet (Bill’s personal story is here) works every day on behalf of our clients, reviewing portfolios, identifying solutions and saving people money through intelligent planning. Bill’s expertise has enabled us to take on more complicated cases and streamline the asset “location” process across our entire practice.

Bill reminds us that as the year comes to an end, there are things smart investors should be doing to reduce optimize their taxes. His key 6 items are shown below. 


1. Pay yourself first: make sure you’re maxing out your tax-qualified accounts at work

Tax-qualified accounts – 401ks, HSAs, FSAs – look to be increasingly valuable if tax reform goes through as proposed. This week, with three or four pay periods to go, pull up your pay stub and check on a few items to make sure you’ve already hit your funding goals or will before the end of the year.

  • 401k contribution ($18,000 max // $24,000 if over 50)
  • FSA – Flexible Spending Accounts – have various limits, for example $5,000 for dependent-care expenses, or $3,060 for commuter expenses
  • HSA – $6,750 for family plans // $3,400 individual


2. Fund those IRAs & SEPs & 529s now

529 college savings plans have a 12/31 deadline for contributions to be deductible in the current year. If you live in one of the 34 states that offer a tax deduction, we strongly recommend making the contribution prior to the end-of-year deadline to take advantage.

IRAs and SEP IRAs have a funding deadline of 04/15 (or 10/15 for certain taxpayers) for the prior tax year, but why wait until the last minute? Time is literally money when it comes to compound gains, so while most taxpayers delay and defer making retirement contributions until it’s absolutely necessary, you would be wise to take advantage of four or five extra months of market performance rather than waiting until the contribution deadline.

SEP IRAs can be tricker since maximum contributions are determined by net income for the tax year, but there isn’t anything preventing a taxpayer from funding their SEP below the anticipated maximum, and then adjusting the value by adding funds once the accounting work is completed.

3. Fill up lower tax brackets with Roth IRA conversions

If you had a low income year, but anticipate your income to be higher in future years, consider converting some of your Traditional IRA assets to Roth.

Doing so generates taxable income in the current year – Traditional IRAs are tax-deferred after all, and are not eligible for step-up basis at any point – but if your marginal tax bracket is going to be lower in 2017 than in future years it might make sense to get the tax over with.

The key benefit is that future growth of funds from the Roth will likely be distributed to your income-tax free.

For example, consider a taxpayer who is 66, earning a $65,000 annual pension (after exemptions and deductions), who plans on receiving Social Security benefits for the first time next year in 2018. The 25% tax bracket for 2017 doesn’t kick in until $75,900. A conversion from Traditional to Roth assets of $10,000 would be taxed at $1,500 in 2017, vs. future years which would likely be taxed at 25% or higher, thus saving $1,000 on the conversion. This strategy requires calibration so we’d recommend discussing this with your tax professional before executing.

4. Tax loss harvesting

Asset classes or specific holdings in your portfolio that have declined in value during the year can be sold to generate a tax loss, offsetting capital gains elsewhere in your portfolio, or ordinary income up to $3,000 per year. We often deploy this strategy towards the end of the year for clients who could benefit from it, and it’s worth a look at your own holdings in a self-managed account.

Do the cost/benefit analysis on this however – trading costs and slippage could overshadow the benefits of harvesting tax losses for certain investors. Also, ensure that you don’t repurchase the position for 31 days following the loss sale, otherwise the wash sale rule will apply and your tax loss will carry forward.

Doing so in 2017 could be the last opportunity for a while – the Senate tax bill will remove this option to target specific tax lots, instead forcing an average tax basis method for all taxpayers.

5. For charitable contributions: instead of giving cash / check, consider a donor-advised fund

Most investors give to 501(c)(3) charities not only to change the world, but to benefit from charitable tax deductions. These contributions can be significant – for a taxpayer in the highest marginal tax bracket of 39.6%, a $10,000 donation could result in a $3,960 tax reduction.

For a client who has highly-appreciated securities, using a donor-advised fund in lieu of cash can amplify the tax benefits. Donations through a donor-advised fund that ultimately end up at a charity qualify for the same tax deductions as cash contributions, but could help investors avoid capital gains taxes on the appreciated securities as an added benefit.

For example, an investor who has $10,000 of securities with a $1,000 basis would be subject to a 15% long-term capital gains tax of $1,350 if they liquidate the securities in their own account. By transferring the securities to a donor-advised fund, the investor will avoid the capital gains tax entirely, and then also deduct the market value of the contribution at their highest marginal rate. For a 39.6% taxpayer, that would result in $3,960 of tax deductions + $1,350 of capital gains avoidance, for a total benefit of $5,310. The taxpayer receives $5,310 of tax reduction and the charity receives $10,000 of donation – everyone wins (except for the US Treasury).

6. Consider accelerating state & local tax payments, medical expenses into 2017

The Senate version of the tax reform bill (as currently constructed) would repeal state and local income tax payments, as well as all real estate tax deductions for your primary residence. Medical expense deductions also get the axe.

While the outcome is very uncertain, there is some logic to accelerating these expenses into the current tax year when we know that they will be deductible. For example, if your real estate tax bill for 2018 is due in January as it is in New York, you may contact your local tax collector’s office to arrange to make the payment prior to December 31st, thus being able to deduct it in the current tax year. If you have been putting off an out-of-pocket medical procedure such as dental surgery (!), it might make sense to make an appointment with your dentist in December.

The benefits of doing so would only be available to taxpayers who itemize their deductions, and aren’t subject to the AMT which limits excess deductions.




William Sweet, CFP®, is an Investment Advisor at Ritholtz Wealth Management. He served on active duty in the US Army as an Armor Officer for six years, was awarded the Bronze Star for valorous action in combat in 2003 during Operation Iraqi Freedom. Bill holds a degree in Computer & Systems Engineering from Rensselaer Polytechnic Institute (RPI). You can read his prior work here and here.

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