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What to Get Clients Thinking About by Year End

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Oct 18th 2018
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With a little more than two months left to year end, it’s time to talk to your clients about how their tax picture will look different very soon. What can they do to improve the situation?

You know the positives. They probably do too. There are plenty of articles telling the story, but overall your clients are probably most interested in what might end up costing them more next tax season. Two big areas are:

1. Mortgage Interest Deduction Reduction

They were able to deduct interest on $1,000,000 worth of mortgages. Now it’s $750,000. This might get them worried

Strategy 1: Explain the problem isn’t as big as they think. Mortgages in place before December 15th, 2017 are grandfathered under the old rules. The new rule applies to new mortgages.

Strategy 2: Did they take out a mortgage after December 15th? Does it make sense to pay off one of their mortgages? The rate they are paying in interest is likely higher than the low interest rate their cash is earning.

2. State and Local Taxes

It’s a big one. Their deduction for state and local taxes paid will be capped at $10,000. If they live in a state like New Jersey with high property taxes, this is going to cost them. This problem is even bigger if they live in an area like Long Island or Westchester County in New York, where you have high state income taxes in addition to property taxes.

Strategy: There’s not much you can do. They might have tried accelerating payments to fit them into 2017. They can’t really delay payments until 2019 because they would get a hefty late payment penalty. They’ll have to live with this one.

Same Old, Same Old

At the same time, there’s a lot that hasn’t changed. These are areas that require the most attention before year end that you and your clients should not lose sight of:

1. Mandatory retirement plan distributions

It’s pay me now or pay me later in practice. Once you hit 70 ½, the government wants to see some of that tax deferred money emerge as taxable income. If they don’t take the required distribution, they face a penalty.

Strategy: Their financial advisor should be on top of that one. Ask them to call and confirm.

2. Retirement plan contributions

Hopefully their money is making money. It makes more sense to fully fund retirement plans as early as possible, so the growth taxes place in a tax deferred environment.

Strategy: Get this done as early as possible. There’s still a couple of months left in the year.

3. Estimated tax payments

Say your client has a small business on the side.You gave them deposit slips and envelopes, which they ignored. Both the Federal and State government will charge them penalties for not sending those checks in on time, certainly before the end of the year.

Strategy: Remind them to send them in.

4. Mutual fund capital gain distributions

In many cases, it’s a bad idea to buy a mutual fund in a taxable account in the last couple of months of the year. On a set date, the fund declares and makes its capital gains distribution for the year. The share price immediately drops by that amount. There is no free lunch. However, the recipient is liable for taxes on the distribution, even if they bought the shares the week before and didn’t share in the appreciation.

Strategy: If they’ve heard about a fund and they want to buy it, checkout the distribution date. Buying it in a tax deferred account is a better strategy from a tax point of view.

5. Stock selling

If your client invests in equities, they may want to lock in gains or losses before year end. Welcome to the club, lots of other investors have the same idea. Mutual funds also shift around their holdings. 

Strategy: Don’t wait until the last week in December. Avoid the rush and get this done now! This can be a serious issue if they own a thinly traded stock.

6. Setting up retirement plans

Did they start a business? Some retirement plans need to be established before year end, although the time to fund them may last longer. 

Strategy: If they started a business, ask if they’ve got a retirement plan setup yet.

7. Insurance policies

Ok, so this has nothing to do with taxes. But when your client bought their home or car, they probably needed to have insurance in place. They’ve probably never shopped around, trying to get a better rate. Meanwhile, the insurance company might be raising their rates a little at a time, year after year.

Strategy: Suggest they shop around for better rates on their personal insurance lines.

Having these conversations with your clients Now is another way of showing the value you bring to the relationship. It also helps avoids those last-minute fire drills.

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