Tax planning for the year ahead

Trump with Republican lawmakers at White House, tax bill AP FBN

As 2017 comes to an end, we can look back to a year the market continued to reach new heights, while the economy continued its climb into positive territory — and with the recent passage of the new tax reform act, Baby Boomers’ retirement accounts are poised to have a good start in 2018.

Vice President of Fidelity investments Maura Cassidy offered the following tips for the year-end tax planning. Here’s what you need to know:

1. Contribute to a tax-advantaged retirement plan

Pre-tax contributions to a traditional 401(k), 403(b), or similar workplace retirement plan could reduce your taxes by the amount of your total contribution for the year multiplied by your marginal tax rate.

If you're in the 28% tax bracket, for instance, you could save $280 in current-year federal taxes for every $1,000 you contribute, up to the 2017 limit of $18,000. (Note: Contributions for this year ended on Dec. 29.) If you're age 50 or older, you can contribute an extra $6,000, for a maximum contribution of $24,000.

A traditional IRA and a Simplified Employee Pension (SEP) IRA offer potential tax breaks similar to those of a 401(k) and you have until April 17, 2018, to make a contribution that applies to your 2017 tax return. The maximum IRA contribution for this year is $5,500 for eligible taxpayers under age 50, but $6,500 for those 50 and older. SEP contributions by self employed individuals are limited to $54,000 or 25% of eligible income, whichever is less.

2. If you’re older than 70.5, remember to take required minimum distributions

The penalty for failure to take your required minimum distribution (RMD) from tax-deferred retirement accounts, which includes a traditional IRA and 401(k), can be up to 50% of the shortfall. The deadline for taking your 2017 RMD was Dec. 31, unless you aged past 70.5 this year, in which case you have a grace period until April 1, 2018 to make your first withdrawal.

Keep in mind, however, that if you turned 70 at least six months before the end of the year and wait until 2018 to take your 2017 RMD, you'll owe taxes on two RMDs: the one for 2017 and the one you need to take by the end of 2018. Consider the effect this double RMD may have on your 2018 income taxes. Because Dec. 31 falls on a Sunday this year, if you need to sell securities to raise cash for your RMD, you had to plan to have the trades settled and RMD completed by Dec. 29. This transaction will take at least a couple of days.

One way to ensure you won't miss an RMD is to instruct your retirement account administrator to process the withdrawal automatically each year. Fidelity will calculate your RMD, and you can choose to take your RMD in a lump sum or in installments throughout the year. You can find additional information on required minimum distributions here.

3. Donate to charity

Charitable giving can be a great way to lower taxes, while also contributing to worthy causes. But for your contribution to have a meaningful effect on your taxes, make sure your itemized deductions exceed the standard deduction.

For 2017, the standard deduction is $6,350 for a single taxpayer, $9,350 for a head of household and $12,700 for a married couple filing jointly, or a surviving spouse. The upper limit of charitable deductions is 50% of your adjusted gross income (AGI). (As of Nov. 2, the proposed tax reform legislation called for an increase in the standard deduction to $12,000 for a single taxpayer, $18,000 for single taxpayer with at least one qualifying child and $24,000 for a married couple filing jointly or a surviving spouse. The proposed tax reform would also raise the upper limit of charitable deductions to 60% of your AGI for tax years after 2017. For additional information, visit Fidelity’s Viewpoints tax reform site)

In the current bull market, donating appreciated securities (including stocks and mutual funds) instead of cash, may enable greater tax benefits as well as a larger contribution to your favorite charity. Contributing appreciated securities you have held for at least a year entitles you to a tax deduction and also helps you eliminate the capital gains tax.

Contributing appreciated assets to nonprofits is particularly easy through a donor-advised fund (DAF). With a DAF, you can contribute your appreciated securities (or cash), be eligible for a tax deduction for this year for the full fair market value of the appreciated stock, select how the proceeds are invested for potential additional tax-free growth, and use the funds for future grants to your favorite nonprofits.

Remember to get a written receipt for every contribution you make worth $250 or more. Be sure to have a record of all contributions, regardless of their amount, in the form of a bank or credit card statement, or a receipt from the eligible organization. Handwritten notes or computer logs that you keep yourself are not acceptable.

4. Consider annuities if you've exhausted your 401(k)/403(b) options

While workplace retirement plans and IRAs should be your first choice for tax-deferred contributions, a low-cost, tax-deferred variable annuity may be an attractive option if you have more money to invest for long-term goals than your retirement plans allow. Tax-deferred annuities have no IRS-imposed contribution limits and, when funded with after-tax dollars, they don't have a mandatory withdrawal requirement at age 70—although there may be fees and tax penalties for withdrawing earnings (but typically not for withdrawing the original investment) prior to age 60. Therefore, it's important to consult an investment professional as you develop your plan.

Finally, one important thing: make sure you have beneficiaries on your IRAs and 401(k)s. Since IRAs pass outside of your estate directly to the beneficiaries, it’s good practice to get into to update or review your beneficiaries every year.