Year-End Checklist

Good Morning Relaxing Retirement Subscriber,

December will be here again tomorrow so let’s take our annual opportunity to review a quick checklist of year-end reminders and strategies.

If we’ve all been properly strategizing and implementing throughout the year, as the overwhelming majority of Relaxing Retirement members have, this year-end checklist will simply serve to confirm what we have already done.

However, I know how busy life can get, and I know that managing each little detail in your financial life isn’t always at the top of your list you draw up each and every morning with your cup of coffee.

Given that, if you haven’t already, here are some strategies and reminders to be thinking about and acting on before December 31st:

  • The Tax Cuts and Jobs Act: You may recall that the new tax act was passed at the end of 2017 which resulted in many changes to the tax code. I thought I would begin with a quick summary of the more significant changes to account and plan for:
    • Marginal Tax Brackets were reduced across the board, and the breakpoint income levels increased meaning much more of your taxable income will be subject to lower tax rates. This is certainly good news.
    • Itemized Deductions you were allowed in the past have either been reduced or eliminated which means that more of your income is likely to be subject to those reduced tax bracket rates. Here are some of the deduction changes:
    • Standard Deduction: If you have been itemizing your deductions in prior years, you may now have the opportunity to use the simpler standard deduction instead as the standard deduction has doubled to $12,000 per individual and $24,000 per couple.
    • State and Property Tax Deduction: There is a new $10,000 limit to the amount of state and local property taxes you can deduct on Schedule A. This has a much greater impact on the majority of our members who live in Massachusetts or other states with income taxes.
      • *** Per my recommendation at the end of 2017, you may have pre-paid part or all of your 2018 local property taxes in order to deduct them on your 2017 tax return under the old rules. If you took advantage of that, there’s a greater probability that you will file this year using the larger Standard deduction.
    • Miscellaneous Itemized Deductions: All miscellaneous itemized deductions have been eliminated including those for tax preparation and investment advisory fees like those you pay to RRC. This was certainly an unfortunate component of the new tax code for those who will continue to itemize deductions going forward.
    • Charitable Contributions: You may now donate and deduct up to 60% of your adjusted gross income in cash contributions. We will be discussing two strategic ways of giving in an upcoming edition of The Retirement Coach Strategy of the Week.  *** Please stay tuned.
    • Mortgage Interest Deduction: You may now only deduct mortgage interest on $750,000 of loans vs. $1,000,000. If you had a loan in existence prior to the end of 2017, you many continue to deduct up to the $1 million limit.
  • Medicare: Open enrollment for Medicare, including Part D, ends next Friday, December 7th. Don’t miss this opportunity to shop plans to best suit your health needs and your wallet.  Check out the non-government website for great information: This is a terrific resource on medicare.
  • Age 70 ½ (and older) Annual Required Minimum Distribution (RMD): If you reached age 70 ½ or older in 2018, you must take a mandatory distribution from your IRA. The amount you must withdraw in calendar year 2018 is based on the combined value of all your qualified retirement plans as of December 31, 2017 (IRAs, SEPs, 401(k)s of ex-employers, etc.). Roth IRA values are not included, and the value of a 401(k) plan you are still contributing to is not included unless you are more than a 5% owner in the employer sponsoring the plan.
  • Capital Gains and Losses: In addition to your realized capital gains so far this year, both from sales and from capital gain distributions if you still own any actively managed mutual funds outside of IRAs, take a close look at your unrealized capital gain or loss positioning in your Non-IRA accounts right now.

    Then, go back to Schedule D on your 2017 return and verify if you have any realized capital losses that you may have carried forward to 2018.Armed with this all of this information, you can make informed decisions on buying and selling in order to free up cash for your upcoming spending needs.  ***We will examine this in greater detail in an upcoming edition of The Retirement Coach Strategy of the Week.

  • Negative Income: Take a close look at last year’s (2017) federal income tax return. Make sure that your “taxable” income on page 2 of your 1040 is a positive This may sound like an oxymoron, but it’s not.

    As you’ve heard me mention numerous times in the past, I see this way too often with folks in their retirement years, i.e. large itemized deductions which are higher than your taxable income.  Given the changes with the new tax code listed above, this is less likely this year.  However, it’s still possible even for those with significant assets.If your “taxable” income is close to or less than zero because you don’t have to draw on taxable portions of your Retirement Bucket yet, this indicates that you have an opportunity to realize and show more taxable income and still pay little or no federal income 

    How?  Withdraw more taxable funds from your IRA that otherwise would have been taxable, or “realize” capital gains on some of your non-IRA account holdings.

  • Roth IRA Conversion: Explore converting some of your IRA to a Roth IRA, especially if you fall into the “negative” taxable income category (see prior bullet). It gives you an opportunity to convert some (or all) of your IRA to a Roth with no (or very little) federal income tax consequences.  And, allow your money to continue to grow tax free for the rest of your life!

    The key is to be aware of your marginal income tax bracket so you are not paying too much in taxes to convert.  For example, if your IRA is worth an even $1,000,000, converting the entire IRA would subject the majority of the $1 million to the highest federal income tax bracket.  However, converting $40,000 may allow you to do so with no income taxes given your level of deductions.

  • Retirement Plans at Work: If you are still earning money from work, even if that is part time and the income is small, make sure you maximize contributions to your 401(k), 403(b), or 457 MA Deferred Compensation Plans if employed, or your Sep, Simple, Defined Benefit Plan, or IRA if you’re self-employed. Every dollar you contribute comes off the taxable income column on your tax return.  There are restrictions to contributions past age 70 ½, however.
  • Your Spending: In order for you to continue to spend with confidence, take a look at what you spent in 2018 vs. what you predicted you would spend in your Lifestyle Cost Estimator™. Is it more?  Is it less?

    Remember, your goal is NOT to restrict your spending or to “budget”.  It’s simply to “account” for what you’ve spent and be confident that you know your numbers cold.Our most confident and successful Relaxing Retirement Members have a solid handle on this, which, in turn, allows them to spend and enjoy life more confidently.

If you have any questions as to where you personally stand in relation to any of these, please don’t hesitate to call us.  We look forward to helping you.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)