5 Tips for Managing Your Year-End Finances

5 Tips for Managing Your Year-End Finances

December 01, 2016

With the holiday season shifting into full swing, finding the time to focus on your finances can be a challenge for many people. However, as the clock winds down on 2016, there are several important steps you may want to consider to help minimize this year’s tax bill. Scroll down for more details on actions you may want to take before year-end.

5 Tips for Managing Year-End Finances

1. Manage Your Income and Tax Deductions. If you’re on the threshold of bumping up into higher tax bracket, deferring income or accelerating deductions may help prevent that from happening. If possible, consider deferring some of your income to 2017. You may also want to consider making any planned charitable donations before year-end. Similarly, if you’re close to qualifying for a deduction for medical expenses that exceed 10% of your adjusted gross income, consider paying those bills before year-end.

2. Harvest Tax Losses. Tax-loss harvesting enables you to offset capital gains with capital losses. For example, if you exercised stock options earlier this year and incurred a $10,000 capital gain, you could sell securities that have declined in value since purchase to offset those gains. Remember that capital gains taxes apply only to your taxable, non-retirement accounts.

Capital losses can also be used to offset ordinary income, but only up to $3,000 per year. Any losses not used this year can be carried forward to future years. It’s also important to be careful not to violate the wash sale rule, which is designed to prevent investors from temporarily selling shares to gain a tax advantage and then repurchasing them a short time later. Contact your tax advisor or us if you would like to discuss these strategies in more detail.

3. Manage Your Stock Options. If you own non-qualified stock options (NSOs) or incentive stock options (ISOs), consider the best time to exercise these options. If you exercise this year, the additional income could bump you into a higher tax bracket. Therefore, you might be better off waiting until 2017 or later to exercise. Before making any decisions, ask your tax advisor to prepare an alternative minimum tax (AMT) projection. This will help you determine whether it’s better to wait until next year or even later to exercise options.

4. Optimize Your Charitable Giving. If you typically donate to charity by writing checks or donating cash, you may want to consider a more strategic approach. That’s because when you sell an appreciated asset and donate the proceeds to charity, you incur capital gains tax. Donating appreciated securities directly to charity can help you avoid capital gains and enable you to donate more to your favorite causes. If you make significant charitable donations on a regular basis, you may want to consider establishing a donor-advised fund to manage your philanthropy.

5. Manage Your Estate Tax Exposure. IRS rules allow you to gift up to $14,000 per year ($28,000 for married couples) to as many people as you want, without incurring a gift tax. The total value of your gifts cannot exceed the current lifetime exclusion limit of $5.34 million. If the value of your estate is high enough to be subject to federal and/or state estate tax, annual gifts can help reduce the value of your taxable estate. But you need to make these gifts before year-end to qualify for this exclusion.

This list of year-end tips is far from exhaustive and you may have unique financial planning concerns not covered here. As you prepare for the coming year, please feel free to reach out to me to discuss your financial challenges, goals, and any other concerns.

In the meantime, I wish you and your family a happy, healthy, and prosperous 2017!