Making withdrawals from your IRA — You’ll owe income tax on the amount withdrawn (unless it’s a qualified distribution from a Roth IRA) and possibly a 10% early withdrawal penalty if you’re under age 59½. Although you’re required to begin taking distributions from your IRA after age 70½, consider instead having some of that required amount sent directly to charity. You’ll avoid the income tax you would have owed.
Selling stock that has gone up in value — There is a capital gains tax on the profit. In most cases, you’ll lose 15%, although a few taxpayers may be taxed at 20%, plus a 3.8% net investment income tax. The added income might also affect how Social Security benefits are taxed. Ask your financial adviser about offsetting some of your gains by selling stock that has gone down in value. Another satisfying option is to contribute the shares to charity, avoid all taxes and qualify for a charitable deduction that may allow you to itemize your deductions.
Writing a check to children or grandchildren — Many people use annual gifts to family members (up to $15,000 per person in 2018) to shift family wealth. Consider giving assets likely to appreciate in value. Appreciated stock makes an excellent gift, since family members may pay capital gains tax when they ultimately sell of only 15% — or possibly even 0%.
Relying on your state’s “estate plan” — Each state has a distribution plan for residents who die without drafting their own wills or living trusts. But state laws don’t consider the special needs of family members and others who depend on you. States’ “wills” don’t take advantage of opportunities to minimize taxes or distribute assets in the most tax-advantaged way. You can seize these opportunities, however, by having your own estate plan prepared by a knowledgeable professional.