Financial advisors are reminding clients one last time of last-minute steps they can take in the closing days of 2017 to save money on their taxes - steps that won't be invalidated for their 2017 returns by pending federal tax reform .
[ibd-display-video id=3021370 width=50 float=left autostart=true] Here are some of the most effective and practical last-minute tips that financial advisors recommend to their own clients, and which they shared with IBD. As Dave Du Val, chief customer advocacy officer at TaxAudit, in Folsom, Calif., points out, he makes recommendations to clients only after establishing a complete understanding of their tax and financial situation and determining that the specific tip would be beneficial to them.
- Determine if clients will owe the AMT. Why? "To get a handle on last-minute moves, it's important to step back and project what your tax situation for 2017 will be," said EY's Greg Rosica, contributing author of the EY Tax Guide 2018, from the firm formerly known as Ernst & Young.
Since a client who is subject to the AMT can't use various deductions, last-minute tax-prep steps to maximize those deductions might not do him any good.
- Harvest tax losses. Thomas Walsh, client service and portfolio manager with Palisades Hudson Financial Group's Atlanta office, advises clients to determine if they can harvest tax losses from mutual funds. Walsh told IBD that he advises clients, "If at the end of the year you're facing a large distribution from a mutual fund in which you have an unrealized loss, consider liquidating the position before the record date. In doing so, you will not only avoid taxable income, but also generate a capital loss. This capital loss can be used to offset other capital gains from the same tax year."
Walsh reminds clients that to the extent their loss exceeds their capital gains, that amount can be used to offset up to $3,000 in ordinary income. Any remainder can be carried forward indefinitely.
- Beware of the wash-sale rule. This goes hand in hand with tax-loss harvesting, says Ben Barzideh, wealth advisor at Piershale Financial Group, in Crystal Lake, Ill. An investor might be able to book a loss now but still like the prospects of holding the security long term. The rule prevents investors from offsetting gains with losses if the securities sold at a loss are repurchased within 30 days.
But if that stock he likes was held by a mutual fund, he can avoid violating the wash-sale rule by investing in another fund within 30 days that holds the same stock but whose portfolio is otherwise substantially different from the original one.
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- Maximize retirement plan contributions. And self-employed clients must keep their deadlines for action straight, says Al Zdenek, president and CEO of New York City-based Traust Sollus Wealth Management.
If a client is self-employed, he must set up an individual 401(k) plan by his business' fiscal year-end, generally Dec. 31, Zdenek says. He tells clients that employer and profit-sharing contributions can be made up until the business' tax filing deadline, which is generally April 15, plus any extensions.
In his capacity as an employee of his own company, your client can make his own contributions to his account as late as his business' tax filing deadline (generally April 15 or March 15 for corporate entities), plus any extensions.
- Put compounding to work for your clients. There's another reason for making retirement plan contributions by Dec. 31. EY's Rosica says it's important to remind clients to give their nest eggs as much time to grow as possible. "You want to contribute as soon as possible to give your money as much time as possible for tax-deferred build up of earnings," Rosica said.
- Convert assets to a Roth IRA from a traditional IRA. The amount a client converts will be subject to income tax. But TaxAudit's Du Val points out that there nevertheless are several benefits to conversion.
First, when your client eventually withdraws money from the Roth, the withdrawal will be free from tax and penalty if he is at least 59-1/2 years old and the account is at least five years old.
Second, your client won't be required to start taking withdrawals when he reaches age 70-1/2. In contrast, he would be required to start withdrawals from a traditional IRA. So, with a Roth, his money can continue to grow tax-free.
Third, whoever inherits your client's Roth IRA will have to take annual withdrawals, but they won't have to pay federal income tax on the money if the account's been open for at least five years.
Since your client will owe income tax on any conversion amount, he might prefer to convert just part of his traditional IRA balance each year rather than all at once. If he converts some of it before Dec. 31, he won't lose a year.
Worse, if he doesn't act this year, he may lose out entirely. "This conversion may no longer be possible under the new tax bill," Du Val said.
- Pay state income tax and local property tax. Even if the taxes are not due until some time next year, Du Val advises clients to pay them before Dec. 31 so they can take the deductions on their 2017 return.
Any trimming or killing of this deduction rule could take effect in 2018, Du Val says.
- Contribute to charity. "Even if (a taxpayer) doesn't know which charity he wants to donate to, he should give to a donor-advised fund before year-end," Rosica said. That way, he qualifies for the deduction even though the money has not gone to its final recipient.
And urge charitably inclined clients to consider donating highly appreciated securities they've owned more than one year instead of cash. In addition to doing good, those clients will avoid paying capital gains tax they would have owed if they sold the securities to fund a cash donation.
Also, they'll be allowed to deduct the full market value of the securities, up to IRS limits.
- Take a Qualified Charitable Distribution (QCD). Remind charitable clients that if they are age 70-1/2 or older, they're allowed to give up to $100,000 a year from a traditional IRA to a qualified charity, Barzideh says.
In addition to doing good, this donation counts toward satisfying the amount of money they're required to withdraw from their IRA. Also, the withdrawal is not counted as part of their taxable income. That matters because the lower their adjusted gross income is, the less likely it is that they'll lose their income-based eligibility for various deductions and tax credits.
"This is great for people (who) regularly give to charity anyway," Barzideh said.
A QCD must be made directly to the charity. If clients take out money in the form of a check, they must make it payable to the charity, not to themselves, Barzideh warns.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
