End-of-Year Tax Planning: 7 Tips for Financial Professionals
The final months of the year are always busy – between holiday festivities and last-minute client requests. Before you know it, April showers will bring with it that busy-bee tax return season.
It’s also a time when clients may be reflecting on your value add – after all, the value you deliver is equal to the value your clients realize. Use these seven EOY tips to ensure all your tax planning boxes are checked.
7 Year-end Tax Planning Tips
These seven tips can help you engage with clients during the holiday season and prevent that dreaded end-of-year rush.
1. Check on those RMDs
It’s a good idea to confirm all required minimum distributions (RMDs) were appropriately taken or estimated to be taken before year-end. Remember, there is a hefty 50% penalty of the total amount of all undistributed RMDs.
2. Complete gains/loss harvesting
Tax-loss and tax-gain harvesting is a simple way to and engage them in their financial plans. Plus, it drives home the fact that investments and taxes are two sides of the same coin. You as a comprehensive advisor have eyes on both the portfolio and the tax implications of how that portfolio is managed.
3. Have charitable giving conversations early
Charitable giving must be completed by December 31st to count toward that year’s taxes. You may have several clients that wish to do a big push at the end of the year to get that done, so start those conversations early to avoid a last-minute rush.
If your client(s) anticipate opening and/or contributing to a Donor-Advised Fund (DAF), this step is especially important.
4. Consider converting traditional IRA funds to a Roth IRA
Anyone can do a Roth conversion, but it’s a great touchpoint for advisors to use with clients because it can be an intimidating prospect to address on your own. Since December of 2017, Roth conversions can no longer be recharacterized – which means there’s no undo button, so it’s a great conversation piece with clients.
If a lower income year pushes them into a lower tax bracket, that might be a good time to rollover assets into a Roth IRA. Whether that’s due to a job change, a lower than anticipated bonus, time out of the workforce, or some other factor, performing a Roth conversion during a low-income year can result in lower lifetime taxes if that same income would be taxed at a higher rate later.
Another big bonus? While Inherited Roth IRAs still have required minimum distributions, beneficiaries don’t have to pay taxes on those distributions!
Related: The Roth Conversion Two Minute Drill
5. Monitor mutual fund distributions
Even in a down year (and sometimes because of that down year), many mutual funds will be making capital gain distributions. For clients holding funds in taxable accounts, you’ll need to look at each clients’ holistic financial plan to determine if selling the fund position and realizing any gains results in a lower tax bill than keeping the fund and paying taxes on year-end distributions. There are three main aspects to consider for this step:
- Fair market value
- Cost basis
- Estimated mutual fund capital gain distributions
6. Check on age-related milestones
With each new year comes the chance that a client could reach age-related financial milestones. As you wrap up your yearly tasks, take a moment to consider whether your client will qualify for any of the following next year:
- Qualified Charitable Distributions
- Social Security claiming
- Catch-up contributions for retirement plans
- Medicare surcharge issues
If any of these are applicable to your client(s), you’ll want to give them a heads up about any forthcoming changes to their plans.
7. Top off annual contributions to IRAs, Health Saving Accounts, 529 plans, etc.
Although contributions to IRAs and HSAs for the current year can be made as late as next April 15th, you may want to give folks a heads up about this now, as it’s a nice way to keep it top-of-mind for your clients. 529 plans don’t have the same contribution extension into the next calendar year, though account holders can lump a few years’ worth of gifts into a single year if necessary.
Bonus tip: Gather client feedback
Client satisfaction is the bread and butter of the financial industry. If your clients aren’t happy, you’re less likely to retain AUM and gain new prospects from word of mouth. A great way to check in with your clientele is to directly ask for their feedback in the form of a survey or questionnaire. To understand your clients’ attitudes toward your tax planning services, include a few questions centered around tax planning satisfaction. Once you’ve received a significant pool of feedback, look for general trends of how you can improve your value in the coming year.
The holiday season is always bursting with business. With these seven tax planning tips, you can wrap up your yearly tax activities and avoid the last minute rush.
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