Make It Last – Ep 36 – 7 Year End Tax Planning Tips

It’s not too late to take advantage of some year-end tax planning tips. We’ve got 7 of them for you to consider before December 31st.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Private Client Capital Group.

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Make It Last – Ep 36 – 7 Year End Tax Planning Tips

Click the link below to read the full transcript…

Announcer:  Welcome to “Make It Last.” Helping you keep your legal ducks in a row and your nest egg secure. With your host Victor Medina. An estate planning and elder law attorney and Certified Financial Planner.

Victor J. Medina:  Everybody, welcome back to Make It Last. I am your host, Victor Medina. I am so glad you could join us here this Saturday morning right here on WCTC 1450 AM. It’s my pleasure to be with you as we’re going to talk about some end of the year tax planning tips. I’ve got seven of them for you.

As of this recording, if you’re listening to the podcast, it’s December 16th. There’s another reason why you should be subscribed to the podcast because you can get this episode delivered to your email box or your favorite iPod podcast catcher right at 8:00 o’clock in the morning on Saturday. If you are a subscriber and you listen to this early, or you’re just with us here on the radio, it’s December 16th.

We’ve got about 14 days left in the end of the year ‑‑ 14, 15 days ‑‑ and we’ve got some time to do some end of the year tax planning.

I want to give you my seven top tips that you can put in place before the end of the year that will help with your income taxes, gift taxes ‑‑ basically anything that you’ve got in front of you ‑‑ and you might want to consider those.

In the middle of the show, if you want to go ahead and grab a pad and pencil and jot these down, they’d be great. You could really get yourself ahead of the game, not only for what you can do before the end of this year, but we’ll talk about how to set yourself up going into 2018. That can have a lot of power for you as well.

Before I get started, though, I am happy to announce that on December 11th, I was featured in “The Wall Street Journal” print edition. The article came out a little bit earlier in the month ‑‑ I think December fourth or fifth ‑‑ but what it was focusing on was the kind of planning that you should have in place if your children start to turn 18 and become adults.

This is really geared at parents who have got their kids turning 18 and wanting to know what are the right legal documents to have in place.

I was interviewed by a reporter named Cheryl Monk, and she puts together an article for The Wall Street Journal featuring these. I had probably three or four quotes in there. She was happy that I went on background with her, getting her to understand what was important, and I think I crafted some of that story speaking with her just to make sure that we covered all the bases.

It obviously couldn’t feature me the entire time, but I think a lot of the direction of what to talk about and how to talk about it came as a result of some of the additional phone calls that she and I had, just understanding what the information was and how we should present it to the general public that were reading these.

If you are interested in reading the article itself, you can go to Wall Street Journal, and you can take a look on their site for documents you need when a child turns 18. The 18 is just the number there. That actually is the title of it. It will go through that.

It focused on a few things were important in terms of 18. The first is obviously turning the age of maturity. Someone’s an adult at that time. But it also had the sub‑focus on people, kids that are in college because a lot of times you’re in this in between.

If you have an emancipated ‑‑ they’re 18, it’s not really emancipated ‑‑ but if you had some here 18 and they moved out of the house, they’re up on their own. They might have their own legal documents that they put in place, maybe. But for the most part, they’re living on their own. When you have somebody who’s at college is you know they’re still your kid.

They’re not free yet. You’re paying for them to be at school. They’re still coming home and doing laundry in your house. These are not free and clear adults. It’s easy to get caught into the trap that you’re still parenting them like they were before they were age 18. The law sees that differently. It sees these individuals, these fully‑grown adults as having their own rights.

Because of that, unless they’ve got the right legal planning in play, it doesn’t matter that they’re at a college that you’re paying for, these colleges just aren’t going to talk to you because this is an adult. They have rights. When you start to think about the kind of documents that somebody needs…I’m normally a proponent of a full comprehensive estate plan for everyone.

I think that everyone should have a full complement of documents. I’m really focusing that advice parents of minor children, people who are older and facing retirement and the eventual passing away. These people they’ve got stuff and they should have a full plan and not just a couple of documents.

But when you’re looking at someone who’s 18, they don’t really need a will because they don’t own anything. You pay for everything that they have. There’s no independent ownership. They don’t own a home. They don’t own their own car. They’re not even paying their own cell phone plan as you know. They’re still on yours. I don’t know that a will is super important.

The two other documents that are usually the trident of estate planning documents are important. Your financial power of attorney and your healthcare directive. Let’s spend a little time on those in this first segment.

When you think about a power of attorney for someone who’s 18, it’s easy to fall into the trap that because they are young, and they don’t own anything and because they don’t have a lot of access to financial assets that you can get away with a cheapo power of attorney. That’s not accurate because these powers of attorney are things that are reviewed by somebody when the person’s incapacitated.

The more provisions you have in there, the broader it is, the better chance you have of having it be accepted because there’s just no registry of nationally accepted powers of attorney. Your power of attorney that you might sign here in New Jersey or Pennsylvania may be different than what the standard form is.

It’s being issued by Tennessee, if that’s where your kid’s at college. We want to make sure that you have a very broad power of attorney. I’ve said this in other shows but when we do powers of attorney in our office, we make them…they’re about 26 pages long.

The idea behind having them that long is because if somebody becomes incapacitated and I missed adding a provision, I could have done when I drafted it, I can’t get them to go sign a new one.

By definition, they’re incapacitated and they can’t do it. If the paper’s cheap, and it is, just paper. The paper’s cheap. Why not make this as broad as we can.

These forms evolve over time. Something that could be very relevant to being able to manage the affairs of your 18‑year‑old who’s in college is the ability to manage digital assets. That’s an overlooked provision in many stock forms. You might know and learn, or need to access stuff about your kid on their Snapchat, Instagram, and Facebook accounts.

How do you get access to that if they’re incapacitated and you don’t know their password? You need this document that will allow you to gain access. Even the social media things alone, that could give you a ton of information that’s really important to know about where your kid might have been before they became incapacitated and who they might have been talking to.

All super, super important. A power of attorney is very robust, is definitely a recommendation. Related to that, would be an advanced healthcare directive. When we look at the healthcare planning documents, there’s really three of them. You have the healthcare power of attorney, which sometimes is separated from the financial one to deal with the money.

It’s sometimes different to deal with healthcare decisions. You have a healthcare power of attorney. That’s the first one on the healthcare documents. You have an advanced directive. An advanced directive is like a living will.

What kind of care does the person want provided in certain situations, like they’re terminally ill or they’re permanently unconscious? Most of the 18‑year‑olds that we do this planning for, and by the way, the parents are dragging them in to get it done, [laughs] they are unlike our people that are older.

The people who are 70, they’re like, “Look, they’ll keep you around. I’ve had a good long life. I don’t want to be a burden.” The 18‑year‑olds, we drafted in the complete opposite end of the spectrum.

It’s like if you find a hole, stick something in it. [laughs] Because I want them to have the best chance to be around for the longest period of time.

You’re going to have a different living will and advanced directive about the kind of care that you want provided. That’s a second one, the living will. The first was the healthcare directive, and then the last one’s the HIPAA authorization.

The HIPAA authorization is to make sure that you have the ability to access these federally protected medical records. HIPAA is a federal law that is about privacy for these medical records. It includes things like billing records.

There are random audits on HIPAAs. If people have authorized the disclosure of information without the proper release, they can get fined $10,000 per instance. They are going to hold fast to making sure that they’ve got the right documents in place to release this information.

That’s why you’re going to need the HIPAA even though here you are the parent just trying to access medical information and talk to a doctor.

If you want to learn more and read the articles, very, very well written, I love being featured in the Wall Street Journal. It’s one of my favorite periodicals to be in Newspapers, US News and World Report. I’ve really enjoyed being in the Wall Street Journal and if you can go back, go back to the library of December 11th. You can pick it up or you can look online for documents you need when the child turns 18.

When we come back, I am going to talk about these seven tax tips that you can put in place before the end of the year.

Listen to the commercial because it’s nice. Also, go grab that pad and pencil. When we come back, we’ll go over them. Be right back on Make It Last.


Victor:  Welcome back to Make It Last. We’re going to be talking about some year‑end tax planning tips. These are things that you can do before the end of the year that will help improve your tax situation and save you a little bit of money.

The reason why I want to do this now, this is going to air December 16th. Let’s say, if you’re in the podcast it did release on December 16th, is that you still have two weeks to put this step in place.

It is important that you jump on these tips if you’re going to take advantage of one or more of them before the end of the year.

I’ve found that a lot of times people just accept their tax positions being what it is. They punch the information into the tax preparation software or they did visit with their accountant. Whatever the paper says, “Well, that’s what I owe,” and they write the check. You find that if people are a little bit more thoughtful about it, they can use the rules to their advantage.

For right now, we’re going to be talking about rules that apply with the current set of laws. You all know that there’s a lot of discussion out there about new tax laws that are going to be in place.

One thing that I can’t cover in this show is just not enough time and the variables are too great. I can’t tell you whether or not you need to be doing some time this year versus next year or anything else.

I know what the rules are for this year but there’s absolutely no way to guess how the Senate and the House are going to reconcile these two bills, if that, at all, is ever going to pass. It’s important to take the laws as they are right now and use them to our best advantage, because we do have some time to do that before the end of the year.

We’ve got seven tips that are going to help you with this kind of planning, so listen up. Not all of them are going to apply to everybody. I’m going to have some tips for people that are working and we have some tips for people who are retired already.

Obviously, you can’t be in both situations but maybe you can, but most people aren’t going to be in both situations.

We’re going to focus mostly on the retirement planning side, the financial component of it. I do have a couple of state planning tips that are tax‑related but most of them are on financial planning stuff. We’re dealing with your money and specifically how to make sure that you can take care of tax planning for you.

The first tip is making sure that if you participate in an employer‑sponsored retirement plan like a 401(k) or a 403(b), you make your year‑end contributions. You can put this on a title 401(k), 403(b) contributions for the end of the year.

Because you’re not allowed to make contributions between January and April, and still claim them off of your taxes if those contributions are to a 401(k). Those have to be done by the end of the year by withholdings on your salary or somehow contributions that you’ve made as part of the earned income that you have.

It’s really important to make sure that those 401(k) distributions are done by December 31st if you want the ability to deduct them off of your taxes.

Like a sub‑recommendation here, remember if you’re over the age of 50, you are permitted to make catch up contributions. Somebody that’s 50 or older participating in a 401(k) can make contributions up to $24,000 in a year. All of that is deducted off of their income taxes and it doesn’t count towards their earned income.

It’s important to make sure that you do that and jump on this in the last couple of weeks because you may only have one or two more pay cycles in order to help make that happen depending on how often your company pays.

The second tip is the flip side of that. If you are somebody who is over 70‑and‑a‑half, you know that you need to be taking your required minimum distributions. Those are the distributions that you have to take out of your 401(k) or traditional IRA based on your age.

There’s a whole calculation to that. It’s not anything secret. You can go in and get these RMD tables. Depending on your age, it will tell you what percentage you have to apply to the account values as of December 31st of last year.

Whatever the accounts are worth in December 31st, 2016, that’s the number that you’re going to be multiplying against your distribution.

One of these hidden traps is that you have to take distributions out of each one of the categories of accounts, but you don’t have to take them out of each one of the accounts. Let me try to clarify that a little bit better for you.

If you have a 401(k) and an IRA, you have to take your RMDs out of each one of those accounts. You can’t take them all out of the IRA and make it count, and you can’t take them all out of the 401(k).

If you have a 401(k) and then two IRAs, maybe one of the IRS is an annuity and the other one is just invested, you can take the entire amount that’s due to come out of your IRAs out of one of those two accounts and then you still have to take the amount out of 401(k).

The reason why this is a tax planning tip is a failure to take your required minimum distributions, your RMDs results in a 50 percent excise tax against the amount that you had to take out. I’ll just round the numbers, nobody gets rounded numbers, but…

If you had to take out $2,000 this year and you fail to do it before the end of the year, then you will pay a $1,000 in an excise tax or 50 percent of the amount that you’re supposed to take out. It’s really super important. That’s a big, big tax bill.

It’s really important to make sure that you are staying on top of your tax, your RMD withdrawals, and doing that before the end of the year.

You have time to do it. You can call a custodian, you can call your financial advisor. Now, we do this and we’re doing a financial management for investment management people. This is a thing that we insure is done by September. We don’t play with the end of the year, which is because of the impact on the taxes. It is important to make sure that you do this and you get it done before the end of the year.

The next one is also related to retirement accounts and that’s considering making some Roth conversions. The Roth conversions is the payment of tax on an IRA to put it into a Roth IRA account.

The best way to do this, the most powerful way to do this, is to actually pay the tax on the conversion from other money, from savings that you have. Because what you want to be able to do is put the largest power into the Roth IRA because that will grow. The whole benefit of the Roth IRA is that it’s tax free growth and tax free distributions.

If you use the money in the IRA to pay the tax, if you’re going to convert $30,000 out and 10 of it goes to taxes, and you only put 20 into the Roth, that’s not as powerful in terms of the growth. If you move all 30 into the Roth and pay the $10,000 in taxes from somewhere else, then the 30 in the Roth can grow on a compounded basis.

You might want to consider doing that and then the next level ‑‑ I probably just want to spend an entire show on this ‑‑ from that is to actually segment your Roth investments because you have the ability to convert them back again if something happens and they don’t perform very well.

This is what I think about, this is that you might put some of the Roth in real estate, some of your Roth in equities, some of your Roth in another account, and then watch how they perform over the course of the year.

If two of those accounts are up, you would keep them. If the other account goes down, you can reclassify them inside of your IRA. That’s next level of the planning because you should only keep the Roth IRA stuff that’s growing. You should make the conversion than lose money off of it.

Those Roth conversions are often a calculation based on your tax brackets. You need to know a little bit about what tax bracket you’re going to be in. You just don’t want to make an election to move $100,000 over. If some of that $100,000 is taxed at 25 percent, but some of it is taxed at 33 percent, it’s not very efficient.

You want to make those conversions based on what you believe your tax bracket is going to be in the future. If you’re never going to hit the 33 percent again, why would you take it out of the IRA? You’d want to keep in the IRA for that period of time.

Those Roth conversions are things that you want to think about doing before the end of the year so that you can fill your income tax bracket as this proactive income tax planning.

Victor:  When we come back from the break, I’m going to spend some more time on the proactive income tax planning component because it’s a big part of the book that I wrote. It can get a little bit confusing. The Roth is one level of it.

I do want to talk about it, generally, the fourth tip. We’re going to go with five, six, and seven before the end of the show. Stick with us. When we come back from this break, on Make It Last, we will be talking about the seven top end of the year tax planning tips that you can put in place before December 31st. Just stick with us. We’ll be right back.


Victor:  We’re back and we’ve been talking about the tax planning tip that you can put in place before December 31st, your year‑end tax planning tip. We’ve gone through three of them already. We got four more to go before the end of the show.

As a reminder, the first three that we went through are in making your contributions to your 401(k) because that has to be done before the end of the year. The second one is making sure that if you’re over 70‑and‑half, you have taken out your card minimum distributions. The third one is to consider some Roth conversions along the way.

The next one I want to talk about is what we call proactive income tax planning. That’s a big long phrase. I got to find some acronym that makes sense for it. [laughs] But really, it is this concept where every year, you have some income that fills different‑sized cups for your tax bracket. You have a tax bracket at 10 percent and that cup is maybe $18,000 big. You have a next cup at 15 percent and that might go from $18,000 to $75,000.

There’s these brackets that go into this marginal planning. For somebody that is in retirement, a lot of times, they have a lot of control over the tax bracket that they’re in if they’re going to make some conversions out of their IRA. They can fill it up or they can decide not to take some in that year beyond their RMDs.

Some of that’s driven by how much social securities you have, if you get a pension, if you have income from other sources, if you have investments from other sources. In that way, I want people to start to pay attention to their income tax brackets before we get to the December 31st.

A lot times, they’ll just look at whatever the number is in April and then it’s too late to do anything about it. Now is the time that we can do it. If you’re making $50,000 a year and you’re married, you’re in the 15 percent bracket.

But the top of that bracket is actually about $75,000. One of the things that you can do is consider converting $25,000 out at 15 percent. The way that I want you to think about this is you’re essentially locking in your income tax rate on that money.

The reason why you might want to think about doing that is maybe three things. If you’re married, when one of you dies, all that IRA money is going to go in the other person’s name. If they start filing single, which they’re going to have to do, that 15 percent bracket is not $75,000. It’s only $37,000.

All of a sudden, that $50 grand that you’re making per year, more of that is being taxed at this 25 percent bracket. Basically, you’re losing $1,300 a year. It’s a proactive step to make sure that you lock in this rate because in the future, when you’re filing single, it might be that different for that.

The second reason to do some proactive income tax planning is to fill in that cup with money that’s locked in that 15 percent bracket. When you die and you leave your IRA behind, it’s still taxable money to your kids and they pay it at their rate.

They’re probably working, right? If they’re working, their tax bracket is higher than yours. Instinctively, we know that they might be at the 28 or the 33 percent bracket if they’re two people at two jobs. The money that they have to take out at the IRA that they inherited is to be taxed at 33 percent.

Whereas, if you took it out early at 15 percent, you locked in that rate and you insured that it would only pay 15 percent, an ordinary income tax. It’s the same rate as capital gains. That’s pretty good.

The third reason that you want to think of…three reasons on doing proactive income tax planning. The first is to help control what those tax are going to be when you go from married to single. What you want the best ties.

The second reason is part of inheritance planning to make sure that you locked in the rate so that you paid it lower than what your kids are going to have to pay when they receive that money.

The third reason to think about doing it is actually what we call tax gain harvesting. [laughs] A lot of you may know about tax laws harvesting. We’re going to talk about that as one of the last tips. The tax gain harvesting goes like this.

Right now, if you are making less than the top of the 15 percent bracket, my fictional family making $50 grand. The amount between the $50 grand and the $75,000 that is actually, if you realize capital gains, that capital gain’s rate is zero.

You might want to look at your investments. If there’s $25,000 of gain that you can realize in this year, between $50,000 and $75,000, you’ll actually pay zero percent tax on that. That’s something that is carried through in Schedule D.

You want to think about this tax gain, because, I don’t know about you, but zero percent, that’s the best tax rate that I can consider. [laughs] You do want to lock that in. Again, you have to realize that gain before the end of the year. That’s the fourth one, proactive income tax planning.

Then we got a few others and we don’t have much time to do it. One is the tax laws harvesting. You want to see things that are losses. If you sell off the losses, they can onset your gains. It’s a way of reducing your taxable income.

If you’re going to get rid of those crappy investments anyway, it’s a good time to do that. The next thing is in terms of re‑balancing or shifting your asset locations before the end of the year. This is more of a 2018 tip.

In so much as you may want to reallocate your investments. There are good reasons why you might want your bonds to be in your tax deferred account, your IRA, in your equities, or your stocks, and your after‑tax account. When bonds throw off interest, that’s all ordinary income tax.

You don’t have to pay the tax on that until you take the money out of the IRA. If you had those same bonds in your after tax account, you’ll have to pay that as ordinary income tax as whether or not you use that money or spent it. It’s a way of insulating that.

The other thing is that when you look at stocks. Stocks that are held for a long period of time, you get capital gains treatment, that’s 15 percent. None if they’re in the IRA because any money that comes out of the IRA is ordinary income tax rates.

We can see it’s like a smart location for your investments to have the equities in there. Again, it’s more like a next level tip. A lot of people will help you pick investments as investment advisor.

But really, only the top advisors are telling you how to locate those investments for best tax optimization and efficiency. You want to be working with somebody that does that, but you can start to think about doing that in your account.

The last tax tip that we have before we end is actually a gifting tip. A lot of times, people look at their estate. They realized they got more money than they’re going to spend during their lifetime or use. One of the things that they want to think about during is giving away money to their grandkids.

They often ask me the question, specifically in the estate planning context. Can I give my kids money or can I give my grandkids money? There are some numbers around that that you have to know. You’re allowed to give up to $14,000 per person per year.

If you’re a married couple, you can give a grandkid $28,000 that each of you can give $14,000. If they’re married, you can now give that family $56,000, because you can give $28,000 to one and $28,000 to the other. You might want to think about making those gifts before the end of the year, because those gifts are absolutely tax free and they’re also reporting free.

A misconception is that when you have more than $14,000, that you owe tax on the gifts. That’s not accurate. You actually don’t owe any tax on that. You have to file a form. It’s called the form 709, if you give more than $14,000. There’s a reporting requirement.

It’s only when you’ve given more than $5.5 million dollars over the course of your lifetime that you start to owe tax on that money. That’s not been in my clients at all. For most people, you’re not going to hit that level. Even good healthy estates are under two million dollars.

You can give everything go away and stamp any tax on it. You want to do that before the end of the year, because come January, you can make the gift again. The last component is that you can make five years’ worth of gift if it’s for an education. That kind of thing if you’re going to start to pay for education.

You can make those all at once but then nothing for the next four years. Does that make sense? You can do all five years of $14,000 or $70,000 but then nothing for four more years. You can do that front‑loaded if you want.

Those are seven tax tips that could help you before the end of the year. I hope you use them and I hope that you find benefit in doing it. If you miss them, we’re not going to go over them because I’m out of time on the show. [laughs] But you can go ahead and download the podcast and then re‑listen to the show.

The way that you do that is you go to iTunes and you do a search for Make It Last with Victor Medina. You can go to and there are all these feed buttons and ask a young kid how you can add that to your phone so that you can listen to not only this episode but all of the prior episodes that we broadcast.

You can go back and listen to anything you want from there and then go and forth. All of the new shows will be automatically delivered.

Those were our tax planning tips. I got a couple more shows before the end of the year. I want to thank you for joining us on this show. It’s been my pleasure to be with you today and share this information with you.

We will be back every Saturday with a new show, helping you plan your retirement and do all kinds of things thinking about legal and financial matters. This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest eggs secure. We’ll catch you next time.

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