The Best Plan Is A Tax Plan

Taxes play a major role in any type of financial plan and it is important to know what options could be available to you as another year comes to a close. Below are several key tax planning strategies that should be considered as we approach year-end:

1. Traditional IRA Contributions:
Contributions to a Traditional IRA are considered an above the line deduction and can reduce Gross Income up to $5,500 ($6,500 if you’re over 50). In addition, the earnings/growth in an IRA are considered tax deferred, meaning there will be no taxes owed on the earnings associated with the account until withdrawals occur at a later date.

2. Non-Deductible IRA Contributions / Roth Conversions
Depending on a person’s income and age, it may be advantageous to consider a Roth Conversion if there is a substantial amount of tax deferred investments in your Traditional IRA. Roth Conversions allow one to withdraw monies from a traditional IRA and simultaneously convert those funds to a Roth IRA. With a Roth Conversion, you are essentially pre paying any tax liability today, while ideally in a lower tax bracket, and allowing those funds to grow tax-free in a Roth account resulting in larger tax free withdrawals later.

3. Charitable Gifting
For those who are charitably inclined, it is more beneficial to gift highly appreciated securities to charity rather than cash since gifting securities allows you to avoid paying any capital gains tax. When gifting highly appreciated securities to a charity, you can deduct the full amount of the donation (limited to 30% of AGI for long-term holdings) and the charity gets to sell off the securities without having to pay taxes on any of the gains. It’s a win-win for both parties.

4. Health Savings Accounts
Depending on the type of health insurance coverage and deductible, a Health Savings Account (HSA) allows a deferral up to $3,350 if single or $6,750 for families (plus an additional $1,000 if you are age 55 or older) into a tax deferred savings account that can be used to pay for eligible health care expenses. The great news is that these contributions are an above the line deduction and any funds used to pay for qualified health care expenses are tax free! The only stipulation for a contribution to an HSA is that you cannot be receiving Medicare Benefits and you must be covered by a High-Deductible Health Care Plan.

5. Gift your Required Minimum Distribution
Based on cash needs and income for the year, it may be beneficial to gift either a portion or your entire IRA Required Minimum Distribution (RMD) to charity. When you gift an RMD to charity there is no deduction allowed for the amount gifted to the charity but the entire gift is excluded from Gross Income. This not only reduces AGI but also allows gifts to be made to important causes. The one caveat to this rule is that the funds must be transferred directly from the IRA to the charity in order for the distribution to be considered tax-free.

There are various tax planning strategies that could apply outside of this list, and we at BDF are continuously looking for ways to help our clients save on taxes. Please do not hesitate to reach out to your Wealth Management Team with any questions. We are a resource for you!