As the year comes to a close, and you’re busy rushing around to get those final presents for the ones you love, here are a few quick, last-minute strategies for cutting your tax bill on April 15.

1. "Take a small example, take a tip from me. Take all your money, give it all to charity."

Unlike the Sublime song, What I Got, I’m not advocating giving all your money to charity at year-end. But, if you itemize your deductions, charitable contributions are one of the areas you can boost at year-end that may have an big impact come tax time. A caveat of this planning tool is that the Trump Tax Cuts of 2017 (in effect for the 2018 Tax Year) made big changes to the Standard Deduction and will reduce the number of Americans who will qualify to Itemize their Deductions. However, you may want to look into “Bunching” to take full advantage of the tax law changes.

What changes brought about by the Trump Tax Cuts of 2017 will impact most people?

The Trump Tax Cuts of 2017 not only increased the Standard Deduction, but also made some significant changes to Schedule A (Itemized Deductions).

They eliminated Miscellaneous 2% Deductions (think unreimbursed employee business expenses, investment management or tax preparation fees, and union dues), put a $10,000 cap on state, local, real estate and property tax deductions, limited the mortgage balance allowed to take the mortgage interest deduction and limited the deductibility of home equity loans or lines of credit unless that money was used to improve your home.

What is "Bunching"?

"Bunching" is a term to describe either pulling ahead deductions to the current year or pushing out your deductions into later years.

With the changes to Schedule A, most Americans will not qualify to Itemize given the new, higher Standard Deduction. That doesn’t mean that they can't make some adjustments to qualify every once in a while.

That’s where "Bunching" comes in.

Maybe you’re a charitably-inclined Married Filing Jointly couple. You usually give $10,000 or so each year to charities. You’ve got mortgage interest of $5,000, and state, local and property taxes totaling $8,000 each year. Those 3 pieces of Schedule A only total $23,000, so you’ll take the $24,000 Standard Deduction.

What if I told you that instead of donating $10,000 in 2018, you pull $5,000 of what you’d normally donate in 2019 into 2018? Well, your Itemized Deductions now amount to $28,000 and you’re able to itemize. In 2019, you’ll just donate the remaining $5,000 to charities and claim the $24,000 Standard Deduction. In 2020, you’ll donate a bit more again to boost your Itemized Deduction amount and so on.

Donor Advised Funds

I know what you’re saying. I really don’t want the charities to receive a big donation from me in 2018 and then get less from me in 2019. Well, there’s an account that you can utilize to take a charitable deduction and still retain control over where that money ultimately goes along with discretion over the timing of those distributions.

It’s called a Donor Advised Fund. A Donor Advised Fund allows you to donate appreciated securities (or cash), take a full deduction on your gift, and then have the ability to make “gift recommendations” to your favorite charities over time. Many also allow you to invest the account and possibly grow it for higher future gift recommendations. Since the tax deduction is taken when the securities or cash are gifted to the Donor Advised Fund, you won’t get an additional charitable deduction when a gift recommendation is fulfilled to your favorite charities. Some examples of DAFs are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. There’s typically a minimum initial gift (most are $5,000 or more) required to establish the account and then you can make subsequent gifts of any amount.

2. Sell your losers

The markets have been choppy this fall and some investments that you hold in taxable accounts may have unrealized losses. If you have a taxable investment account, look through your account. It may be tax advantageous to sell some of your positions that are in a loss and capture the tax benefit. This is referred to as Tax Loss Harvesting and is a great strategy to utilize, just make sure you are very aware of the Wash-Sale Rules.

Capital losses are able to offset any capital gains (or capital gains distributions) you incur as well as offset up to $3,000 of ordinary income. Any losses over and above your capital gains and the $3,000 of ordinary income can be carried forward for use in future years. 

3. Open and contribute to an IRA

Luckily, you can open and contribute to an IRA up until the tax filing deadline (without extensions). For the 2019 tax year, the deadline is April 15, 2020.

As you may, or may not know, the “I” in IRA stands for “Individual”, meaning, each spouse can open and maintain a separate account. There are no “joint” IRAs.

If you’re a married couple making less than $103,000 ($64,000 if single) in 2019, each spouse could make a fully deductible contribution to a Traditional IRA of $6,000 (plus $1,000 “catch-up” if over age 50). Not only are you saving money toward your eventual retirement, but you’re also receiving a tax deduction for the amount of your contribution for the current year. Growth on your money within a Traditional IRA is tax-deferred. When you pull money out, all will be taxed as ordinary income.

Another option would be to open and fund a Roth IRA. If you’re a married couple making less than $189,000 ($120,000 if single) in 2019, each spouse can make a full contribution of $6,000 (plus $1,000 “catch-up” if over age 50) to a Roth IRA.

A Roth IRA differs from a Traditional IRA in that you do not get an upfront tax deduction for the amount in which you contribute. However, any growth on the account in the future is tax-free. This type of account is especially great for those who believe their tax rate now is lower than what they expect it to be in retirement. If nothing changes between now and 2025 when the individual aspects of the Trump Tax Cuts expire, tax rates will be higher going forward.

4. Check your Flexible Spending Accounts  

This tip isn’t going to help you reduce your taxes for this year, but it may help you from losing out on some of your savings from this year.

Healthcare Flexible Spending Accounts (HFSAs) are designed to be a way to stash money away for healthcare expenses during the year. The downside is the requirement of these accounts to be fully dispersed by the end of the year or you forfeit that money. The infamous “use it or lose it” provision.

Check your balance in your HFSA and if you still have money remaining, stock up on qualifying items prior to year end. Here’s a pretty good list from ADP of what does and does not qualify for HFSA reimbursement. Some employers allow a portion of the HFSA account to roll into the next year. Check with your employer for more details.

Focusing on a few of these tips prior to year-end may just put you in a better position come tax time.

About Chessie Advisors

Erik O. Klumpp, CFP® EA, believes that teachers, engineers, and young professionals should have access to objective, fee only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.

4 Steps to Keep You from Panicking During a Market Downturn

Investors over the past 6 years have largely been able to invest aggressively with few consequences. (assuming they’ve been able to put behind them the tumultuous market correction of late 2008 and early 2009).

The market events of last week starting in China that has spread globally as well as today’s 1,000 point drop in the Dow Jones Industrial Average at the market open, will hopefully make investors re-examine what they’re doing.

I don’t believe in market-timing or pulling out of the stock market completely. What I try to get my clients to think about is their risk appetite and their “sleep at night factor”. Identifying a portfolio that allows them to stay in the market, while also working to meet their long-term needs is the goal.

Contrary to many financial advisors, Chessie Advisors believes that your investments should be driven by your financial plan instead of having your investments drive your financial plan.

Below are four steps to keep you from panicking during market downturns:

Step 1: Put together a financial plan

What is my American Dream? When do I want to retire? Can I afford to send my kids to college? These questions and many more can be analyzed if you take the time to develop a financial plan. You can do this on your own or hire an advisor to help.

If you’re not comfortable doing it on your own, you’d rather spend what little time you have outside of work with those you love, or doing things you enjoy doing, find a professional to help. Look for a fee-only financial advisor, the way Chessie Advisors operates. Fee-only advisors are paid only by you, the client, and not by a third-party, like an insurance company or mutual fund company (Brokers or fee-based advisors can sell you insurance or other investment products and be paid by their employer or by the company of the product they’re recommending).

Some good resources for finding a fee-only advisor are NAPFA and the XY Planning Network.

There are many fee-only advisors who will work with you without managing your investments. Identifying your dreams and goals and laying out a strategy to achieve them will help you stay focused when market events occur like what we’ve seen over the past week.

Step 2: Develop an investment strategy

Once you’ve identified what types of investment returns are needed to realize your goals, you can work on putting together an asset allocation that will not only give you the ability of achieving your goals, but also allow you to stay invested for the long-term, and not quit, when the markets bounce up and down.

Just because someone is young, doesn’t mean they should allocate 100% of their investments to stocks, nor should an older investor drawing money from their portfolio in retirement allocate 100% of their investments to bonds. “Rules of Thumb” are not always the best guides.

If you choose to hire an advisor, make sure they are following a “fiduciary” standard of care and only recommending investments that in your best interest (what a fee-only advisor does), not just something they get most compensated by or just investments in their company’s products (like a broker or insurance agent may recommend).

If you choose to do this step on your own, make sure you create a portfolio you can stick with and find someone you can discuss your portfolio with. In big market declines, it’s easy to second-guess your investments and having someone to act as a sounding board is priceless.

Step 3: Revisit your strategy over time

Picking one investment strategy and sticking with it for 30 years is probably not the best strategy. Goals change, your risk appetite may change, and your financial situation may change. Don’t get sucked into allowing your portfolio to get overly aggressive because the market does well (see Step 4 below). Chances are good that you’ll also bail when you see a downturn.

I remember vividly the conversations I had with clients in late 2008 and early 2009, specifically one client on March 6, 2009, three days before the market bottom. We had multiple conversations with the client over that time period, and the client had shifted their asset allocation a few times, out of fear, not because their goals had changed. Emotionally, they couldn’t take the losses any longer and they decided on that day, to cash out of all their investments and stop management of the account.

I have no idea when, or if they got back in the market. My guess is that they were so severely shaken from their stock market losses, that it took a year or more to invest and that they’re a much more conservative investor today because of it. They should never have been as aggressive as they were entering the market decline, but the rising stock markets through the middle of the 2000s allowed them to drift outside their comfort zone.

Step 4: Rebalance (or at least review) your portfolio at set intervals

If you have a set plan to review and rebalance your portfolio, you’re setting yourself up to “buy low, and sell high”. It’s not always easy to rebalance, that’s why you need to set some guidelines of when to revisit your allocation. Monthly, quarterly, yearly. Whatever the interval you decide on, stick with it.

When stocks are doing well, sell some to re-allocate to bonds. When stocks fall, sell some bonds to buy stocks.

If you haven’t already, let the market movements of the past week prompt you to take another look at your portfolio, your allocation, and your long-term goals to make sure they are still aligned. If you need help and don’t know where to turn, reach out to a fee-only financial advisor to at least have a conversation about your situation. Sometimes the best answer is just a phone call away.

About Chessie Advisors

Erik O. Klumpp, CFP®, EA, founder of Chessie Advisors, LLC and Chessie Tax, LLC, believes that teachers, engineers, and young professionals should have access to objective, fee-only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call