5 Things I think I think

December is always a busy time of year for us, even when we aren't anticipating a major tax reform bill like last year. We are working through a number of year-end planning items for our clients from tax projections to tax loss harvesting to required minimum distributions. As I work through these things for our clients I had a number of thoughts come to mind that I wanted to share.

It’s no secret the stock market has been struggling in recent months. All the gains from earlier in the year have been wiped away and as I write this nearly every asset class is in negative territory for the year. Unfortunately for many mutual fund investors, capital gain distributions this month could mean a big tax hit even though their funds have lost value this year. Those distributions didn’t feel so bad last year when the market was posting positive returns but it feels like a double whammy this year to see funds in negative territory making a big taxable distribution. To learn more about capital gains distributions, check out my article from 2014.

Last year saw strong returns across all asset classes, but it was also one of the least volatile years on record. We barely had any days where the markets went up or down by a significant amount. No matter what scary news hit the headlines, the markets didn’t seem to care, they just kept trudging along with slow and steady positive returns. It might be hard to remember just how calm last year was after the day to day volatility we’ve seen the past few months. Now it feels like every news headline causes a strong reaction one way or another in the markets and watching it from day to day might give you whiplash. Unfortunately, the best prescription for this kind of market is to simply stop watching! Remember that you have a long-term plan in place for a reason and trying to guess which way the markets will move is impossible. 

Last year at this time we were waiting for the final details on the big tax reform bill so we could finalize year-end planning for clients. Luckily this year there are no big tax bills on the horizon so we know what to expect for this year’s taxes. We have a more detailed post on year-end planning ideas that you can read here, but I think the biggest year-end tax planning item is to review your itemized deductions. With the standard deduction being increased significantly for 2018 and the state income tax deduction limited to $10k, many people who previously saw a tax benefit from making charitable contributions no longer will. If you are close to that standard deduction amount but likely won’t exceed it, you might be better off delaying any year-end charitable contributions until early 2019 so you can “bunch” your deductions next year and receive a tax benefit. Of course there are more important reasons for making charitable contributions so you shouldn't let your tax situation dictate your giving, just be mindful of the timing of those contributions if you would typically donate right before year-end.

We’ve run a number of tax projections where the revised withholding figures calculated under the new tax rules have been lower than they should have been, resulting in a tax due for clients who might not typically have a tax due. This won’t be an issue for everyone but it certainly could impact some people. Unfortunately the only way to really determine where you stand is to run a detailed tax projection based on your pay stub and projections of your other income/deductions for the year. It can be difficult to come up with estimates for everything but we’d be happy to help you if you want to take a look at your situation.

If you are 70.5 or older this year OR if you have an inherited IRA, you likely (there are some exceptions) need to take a required minimum distribution from the account before the end of the year. The penalty for missing this distribution is 50% of the total distribution amount so it’s critical you don’t forget. The amount you are required to take out is determined by taking the value of the account at the end of last year divided by an actuarial life expectancy factor from IRS tables. We'd be happy to help you run this calculation if you think you might need to take a distribution this year.