As this year draws to a close, our wealth managers are working hard to make sure that you are ready for what lies ahead in 2019. Here are just a few of the important year-end planning opportunities we've been thinking about.

Changes to the Tax Code for 2018

The tax legislation passed by Congress in 2017 made drastic changes to our tax law, significantly altering the tax brackets and deductions available to some individuals. These changes include:

  • Increases to the standard deduction. Doubled to $12,000 for single taxpayers; $24,000 for married couples filing jointly.
  • Limits on deductions for state and local income and property taxes. Limited to $10,000.
  • Limits on the mortgage interest deduction. Limited to mortgages of $750,000 or less for homes bought on or after December 14, 2017; remains at $1 million for homes purchased prior to that date.
  • The reduction of the corporate tax rate. Reduced from 35% to 21%.
  • Pass-through income. Individuals with income from pass-through entities, such as partnerships, LLCs and sub-chapter S corporations, may now be allowed a deduction when computing their taxable income depending on their total income and the nature of the business from which they receive the income.

As a result of these changes, most individual tax payers will no longer need to itemize deductions. This may have an impact on qualified deductions for charitable contributions, including gifts, to donor advised funds.

Those who spread their charitable contributions over a number of years may not receive any tax benefit from these gifts because their combined total deductions are now below the increased standard deduction. In contrast, those who can bunch multiple years of charitable contributions into a single year in order to exceed the standard deduction threshold may be able to fully deduct their contributions.

Using a donor advised fund, such as the independent BNY Mellon Charitable Gift Fund, allows donors to contribute assets to an account. Donors may be able claim an immediate tax deduction and then recommend grants to qualified charities over a period of time. Donors should review their individual circumstances with their tax adviser before making contributions to a donor advised fund.

If you already have a donor advised fund or make regular charitable contributions using appreciated shares, please let us know of your intent to ensure credit for the 2018 tax year.

Gifting Opportunities

If you are interested in transferring wealth to children or grandchildren, the 2018 annual gift exclusion allows for tax-free gifts up to $15,000 per person without it counting toward your lifetime exemption. It's a "use it or lose it" benefit, and we advise taking advantage of it before the end of the year.

Required Minimum Distributions

If you have traditional IRAs and are over the age of 70½ years, you are required to take a minimum distribution from your accounts for the 2018 tax year based on the balance of your accounts as of December 31, 2017. Now is the time to determine how you will make the distribution. Consult your advisor and figure out how much you must take and from which account it should be taken.

Mutual Fund Distributions

Because mutual fund distributions can carry significant tax consequences, we provide distribution estimates for our proprietary mutual funds in an effort to simplify year-end tax planning. These estimates can be used to make necessary adjustments and mitigate the potential tax impact of the distributions, such as realizing losses to offset distributed gains. While these are just estimates and the final amounts may differ somewhat, we feel that the sooner we are able to provide some sense of what you can expect from a tax perspective, the better.

Interest Rates

As expected, the Federal Reserve raised short-term interest rates three times in 2018 and is expected to increase rates an additional 0.25% this December. Many investors have excess cash for liquidity, risk reduction or other purposes sitting in bank accounts potentially earning as little as 0%. The Fed's actions have had a positive effect on savings instruments like certificates of deposit, however. For example, with BNY Mellon's 12-month CD currently offering a 2.45% annual percentage yield, investors would do well to evaluate whether cash assets can be put to work in a more productive way and still maintain their existing risk and liquidity profile.

That said, while rising rates offer an opportunity to earn more on your cash deposits, they can also put additional pressure on any loans you may have. It may be an opportune time to review your outstanding debt or existing contracts tied to interest rates and consider whether you would benefit from refinancing or swapping out an adjustable rate loan for a fixed rate.

Our experienced private bankers can assist in delivering a tailored solution for cash assets to help make the most of this rising interest rate environment.

Estate Plan Updates

If you haven't done so already, this is a good time to review wills, trusts and other estate planning documents to ensure that they reflect any changes in your personal or financial situations that occurred in 2018. Perhaps your family has grown, you've acquired assets that need to be accounted for or simply have a different perspective on how the estate should be handled.

The Tax Cuts and Jobs Act (TCJA) more than doubled the federal exemption amount that can pass free of transfer taxes, which may drastically reduce the potential federal estate, gift or other taxes for families. While this increased exemption may present a tremendous opportunity to pass a large amount of wealth free of federal tax, doing so may inadvertently trigger a significant state estate (or gift) tax.

In 2018, both Federal estate and gift exemptions increased to $11.18 million per individual ($22.36 million for married couples). However, these provisions of the TCJA will sunset in 2026 and revert back to pre-2018 levels unless Congress takes further action. Because this may present a temporary window of opportunity to preserve significant family wealth, we recommend you review your estate plan to ensure it remains appropriate.

Your plan should be flexible to adapt to changes in tax law as well as your personal circumstances. A discussion with BNY Mellon may provide you with additional insights and ideas to consider with your other professional advisors.

Spending and Income Needs

In the current low-yield environment, it's important to regularly reevaluate assumptions around spending and determine whether enough income is being generated to support you. If not, there may be a need to sell off investments to cover the difference, which could result in exposure to capital gains taxes — further reducing your ability to generate a sufficient level of income and raising the possibility that similar shortfalls may occur down the road.

A spending plan can address these issues. We can help you set spending targets, review your most significant expenses and plan for long-term goals, such as paying for a child's college education, purchasing and maintaining a second home or funding your retirement. This plan can assist you in bringing your spending in line with current income levels, or point you toward an investment strategy that may be able to generate the necessary income for your situation.

Asset Allocation Adjustments

Rebalancing, whether by selling overweighted assets, purchasing assets in classes that are underweight or simply adjusting future investments to compensate, can keep your portfolio on track to meet its intended goals. This is also an opportunity to offset the tax impact of any realized gains that have been taken this year through tax-loss harvesting, or by harvesting losses in the portfolio (or, in some limited circumstances, realizing gains to offset losses). We review portfolios on a regular basis to determine if rebalancing is necessary and at the end of the year, we take gains or harvest losses to offset gains as needed.

As always, it is important that your advisory team of wealth manager, CPA and estate attorney work in concert to minimize the government's share of your wealth, especially at this time of year.

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