It's Time for Investors to Set Tax Strategy

The last few months of the year are often packed with holiday gatherings, festive celebrations, and ... preparing for tax season? While the last activity might not be the most fun, it certainly is a necessity.

Most importantly, when done incorrectly, preparing for tax season can cause headaches for months and even years down the road.

So where to start? Last year was the first year taxpayers had to deal with the changes from the Tax Cuts and Jobs Act (TCJA), and while most things remain the same in terms of the impact on your tax return, there are a few things for smart investors to keep in mind in the final stretch of 2019:

-- Take advantage of lower tax rates.

-- Choose deductions wisely.

-- Navigate required minimum distributions.

Take Advantage of Lower Tax Rates

The current tax rates from the new law are quite low -- between 10 and 37%, depending on your filing status and taxable income. This means you might want to take advantage of certain strategies before the tax rates rise again.

A Roth IRA conversion might make sense now if you expect to be in a higher tax bracket in retirement. By moving money from a traditional IRA to a Roth, you will pay taxes on the previously untaxed amount today, while enjoying the money income tax free in retirement.

If the impact of converting the entire IRA would cause too much pain, maybe consider partial conversions over a period of years. A tax professional can help you determine a good strategy.

Another benefit of the current lower tax rates means you might have more money left over for savings. You may be able to contribute to a Roth 401(k) for additional tax benefits in retirement.

Another option would be to look at using those extra dollars to invest in a product that could benefit your retirement income strategy, such as an annuity, which can provide a guaranteed income and a death benefit for beneficiaries.

You may want to look toward financial products that can help manage risks in retirement due to market volatility or inflation, and can provide extra monetary support in retirement by way of guaranteed income without adding an additional tax burden.

Keep in mind, these guarantees are backed by the issuing insurance company.

You might be tempted to splurge with any leftover cash -- either due to low rates or if you get a tax refund in the spring. Investing in an insurance product that can help protect you through retirement may not provide immediate gratification and certainly isn't as 'sparkly" as a new toy, It will, however, be something you'll be grateful for on that day in the future when you may not have that "leftover cash."

A financial professional can help you assess your current situation and which products might be right for you.

Choose Deductions Wisely

The standard deduction was increased and many other deductions were eliminated under TCJA. While this impacts many specific items on a tax return, some of the top ones to keep in mind are state and local tax deductions, medical expenses, mortgage interest, home equity loan interest, charitable contributions, and alimony.

Which deductions end up being applicable to you are dependent on your specific financial situation.

While some deductions might sound like a good idea in theory, you'll want to work with a tax professional to help you assess which deductions are relevant to your situation, and help you take the correct steps.

Navigate RMDs

Investors who have money in tax-deferred retirement accounts, like traditional IRAs and other qualified retirement plans and arrangements, and who are 70½ or older, need to understand their required minimum distributions, or RMDs. These amounts, which must be withdrawn annually, then become part of your taxable income.

However, in the recent Allianz RMD Options Study, the majority of consumers (83%) said they hate paying taxes on their RMDs (no surprise there), and almost a third (32%) find it difficult to understand the impact RMDs might have on their taxes.

The important thing to know is that no matter how big or small your RMD is it will affect your tax return -- especially if it bumps you into a higher tax bracket.

But the good news is you have options. You can reinvest the funds, save it, or use it however you see fit. You can also roll it into a nonqualified annuity or other financial product or account that can help from a future tax standpoint.

Another option is to donate the amount (up to $100,000) to the charity of your choice as a qualified charitable distribution (QCD). These amounts are not taxable, and do not qualify for the charitable tax deduction.

There are specific steps to follow in order for a QCD to qualify so it is critical to talk to a professional before attempting this type of distribution on your own.

No matter what you decide to do, be sure you take your RMD by Dec. 31 in order to avoid a hefty 50% excise tax penalty.

In addition, the TCJA significantly increased the gift and estate tax exemption. The $11.4 million exemption for 2019 is for gifts and estate taxes combined under the unified gift and estate tax exemption.

You can give any number of people up to $15,000 during the year without triggering a reportable gift tax event. Anything greater than that amount must be reported on a gift tax form with your annual tax return.

A tax advisor can help you navigate how to navigate large financial gifts in a tax-effective way.

Now is the time to meet with your various financial, tax and estate professionals to determine next steps for prepping your 2019 taxes.

Planning ahead and thinking through the different scenarios to create the most after-tax value can help you enjoy the last days of the year. What's more, it can help relieve of the stress leading up to Tax Day and well into the rest of 2020.

Disclosures: Any transaction that involves a recommendation to liquidate a securities product, including those within an IRA, 401(k), or other retirement plan for the purchase of an annuity or for other similar purposes, can be conducted only by individuals currently affiliated with a properly registered broker/dealer or registered investment advisor. If your financial professional does not hold the appropriate registration, please consult with your own broker/dealer representative or investment advisor representative for guidance on your securities holdings. This content is for general educational purposes only. It is not, however, intended to provide fiduciary, tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Co. of North America, its affiliated companies, and their representatives and employees do not give fiduciary, tax or legal advice. Clients are encouraged to consult their tax advisor or attorney.

Kelly LaVigne is a contributor to The Smarter Investor blog. He is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of advanced programs that assist financial professionals in serving clients with retirement and estate planning and tax-related strategies. Prior to joining Allianz in 2017, LaVigne was director of advanced markets and director of industry and regulatory strategies for Transamerica Capital Management. Before joining Transamerica, he led advanced markets for AXA Equitable. Prior to AXA, Kelly held leadership roles at ING/Aetna Financial Services and Travelers Life and Annuity. LaVigne holds a juris doctor degree from Western New England College School of Law in West Springfield, Massachusetts, and a bachelor's degree in communications and marketing from Central Connecticut State University in New Britain, Connecticut. He holds his Series 6 and 26 securities registrations. LaVigne is an author and contributor to industry publications such as National Underwriter and Brokers World.

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