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 2018. Here are just a few of the important year-end planning opportunities we've been thinking about. For a more specific discussion about your particular situation, please reach out to your BNY Mellon Wealth Management representative.
Potential Changes to the Tax Code
The tax legislation proposed by Congress would make drastic changes to our current tax law, significantly altering some individual's tax brackets and whether deductions are available to them. While it's unclear what a final bill might include, the proposed bills provide a guiding framework that may indicate how your returns might be affected. Consider reviewing your prior returns and current income levels to gauge whether or not the proposed legislation would result in a higher or lower overall tax rate.
If you believe you'll end up with a lower overall rate, you may wish to defer income until next year and claim any available deductions this year. Similarly, if you believe you'll end up with a higher rate, it may be best to accelerate any income before the legislation takes effect. We can work with your tax advisor to assess the potential impact on your returns and develop a plan to address it, so you're ready whether the bill passes at the end of 2017, in 2018 — or not at all.
Gifting and Charitable Giving Opportunities
If you are interested in transferring wealth to children or grandchildren, the annual gift exclusion allows for tax-free gifts up to $14,000 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.
If you make frequent charitable gifts, you may want to consider establishing a donor advised fund, such as the BNY Mellon Charitable Gift Fund. Because donor advised funds allow for the contribution of long-term, appreciated assets, they not only help fulfill philanthropic goals, they also aid in reducing exposure to capital gains taxes.
Additionally, it's possible that charitable contributions made this year may be tax deductible, depending on the donor's income. Given the proposed increase of the standard deduction and the elimination of most itemized deductions, many taxpayers may choose not to itemize their deductions going forward. Therefore it may be wise to make a sizeable donation to a donor advised fund now, when you can make the most of the charitable deduction, rather than spreading it out over the next few years.
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 2017 tax 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 account for the 2017 tax year based on the balance of your accounts as of 12/31/2016. If we haven't discussed this already, we can help you determine how much you must withdraw based on the value of your IRA at BNY Mellon.
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.
We expect the Federal Reserve to raise short-term interest rates this December, with the potential for two or three further increases in the coming year.
Even so, with interest rates at historically low levels, it may be an opportune time to take out a new mortgage, lock in a low rate by refinancing, swap out an adjustable-rate loan for a fixed rate, or review an existing contract tied to interest rates. Our experienced residential mortgage and private bankers can assist in delivering a tailored, cost-effective solution to help make the most of this low interest rate environment.
Estate Plan Updates
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. 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.
Additionally, it is important to have your documents updated or reviewed to ensure that any potential tax changes will not negatively impact your goals. Because it is unclear what changes may occur, your estate planning documents should be drafted flexibly, to withstand any tax changes in 2017, 2018 and beyond.
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. We can help to identify ways to bring spending in line with current income levels, or reevaluate the investment strategy for the portfolio to see if there are ways to generate more income.
Asset Allocation Adjustments
As investments grow or shrink in relation to one another over time, it's possible that your portfolio might become overweight or underweight in particular asset classes, causing the overall allocation to drift from its target. 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). However, we may also put off rebalancing to 2018 if we can avoid taking additional gains in the 2017 tax year.