When you are a financial advisor, you get slammed in January. Everyone spends the holiday season going over their goals and dreams for the New Year. Getting “financially fit” falls very high on the list of resolutions. But what if I told you that it was just as important to focus on your financial hygiene in December? December can be crazy as everyone is generally rocking around the Christmas tree and spending too much money. But the actions you take in the last month of the year can be very impactful for many reasons. Here are some things you should focus on before year-end:
Make sure you have contributed enough to your 401(k) and to your other retirement accounts
- 401(k) contributions are tax-free contributions. This means that you do not pay taxes on the money that you contribute to your 401(k). You can contribute up to $18,500 per year ($6000 more if you are 50 or over.) Contributing to a 401(k) allows you to pay income tax only when you withdraw money from the plan in the future, at which point your income and tax rate may be lower or you may have more deductions available to offset the income. If you have not maxed your 401(k) this year but would like to, make sure to alert the administrator of your 401(k) so you can increase your contribution for the last month of the year.
- IRA contributions don’t have to be made until you file your taxes but remember that you can contribute up to $5500 to your IRA or Roth IRA each calendar year ($6500 if over 50). In some cases, you may be eligible for a tax-deduction.
Check Your Gains & Losses In Your Investment Account
In the investing world, we use a term called “tax-loss harvesting” where you evaluate whether you can benefit from selling a losing investment to offset gains or establish a deduction of up to $3,000. Excess losses also can be carried forward to future years. Keep the following things in mind:
- Short-term gains (gains that resulted in a sale of less than 366 days) are taxed at a higher marginal rate; aim to reduce those first
- Don’t disrupt your long-term investment strategy when harvesting losses
- Be aware for “wash sale” rules that affect new purchases before and after the sale of a security. If you sell a security at a loss but purchase another “substantially identical security” within 30 days before or after the wash sale, the IRS will consider that a “wash sale” and disallow the loss deduction.
- Talk to your financial advisor about what they recommend as the best tax-harvest strategy
Complete your college savings contributions
If you utilize a 529 college savings plan to save for college, please make sure to get your full 2018 contribution in before year-end. In some states, your contribution is tax-deductible (make sure to check your individual state’s plan to learn more).
Manage Your Income & Deductions
If you are a business owner, this is crucial to do before year-end. Also if you are at or near the next tax bracket, you should also pay close attention to anything that might bump you up.
- If you think you are in the danger zone of getting bumped to a higher tax bracket, consider making a charitable donation (see below for more on that).
- Determine if you should accelerate deductions or defer income, potentially allowing you to minimize your current tax liability. Sometimes your employer will allow you to defer bonuses to the New Year. Also, if you are a business owner and are expecting a payment, perhaps see if it can be paid in the New Year. Check with your accountant!
Make Your Charitable Contributions
Charitable giving is good for the soul and for tax mitigation. Make sure to officially make your donation before Dec 31 for it to count towards your 2018 tax year. There are many different giving strategies that you can implement. They include:
- Giving good old fashioned cash (or check)!
- Donate gently used items and clothing
- Donate appreciated securities: If you own stock that has appreciated over the years, you can receive an immediate tax deduction and this can also help you avoid paying capital gains tax on the appreciated portion of their value. Gifts also have the potential to reduce future estate taxes.
- More sophisticated gifting options: Gifting is a serious business. There are ways to gift through charitable remainder trusts and charitable lead trusts. You can also gift life insurance. If you are considering these options, please make sure to coordinate with a financial advisor, an attorney and potentially an accountant
Evaluate Your Life
Whoa, we just got real deep. Making sure to evaluate any life changes from the past year or the upcoming year is an important part of financial planning. Moving to a new state, getting married or divorced, having a child, changing jobs or retiring are all important life changes. If you think that you have had a material life change that could impact your financial life, it could be a good time to talk to your financial advisor. In general, if you think life is getting too financially complicated to handle on your own, it may be time to hire someone to help you. Perhaps that could be your new year’s resolution. Hope your holiday season is a blast! Just don’t spend too much money.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. O’Keeffe Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
Kristin Merrick, Financial Advisor, O’Keeffe Financial Partners, LLC
Originally published in Forbes, Nov 12, 2018.