Year-End Tax Planning Strategies

As we approach the end of the year, it’s wise to be mindful of the upcoming tax season. Of course, you’ll want to consider the tax impact of your financial decisions throughout the year, but December is the time for last-minute actions to maximize your tax savings or set yourself up for the year ahead. It’s also a time of some important year-end deadlines, which you won’t want to miss.

The tax strategies you employ will depend on your specific circumstances, including your age, income, and financial goals. Here are a few things to be mindful of and techniques we employ to help our clients as the year draws to a close.

Retirement Account Opportunities

If you make regular contributions to an employer-sponsored retirement account like a 401(k) or 403(b) but are not on track to maximize the annual contribution, consider depositing a little extra over your last few pay periods. Maximizing your contributions allows you to reap the full benefit of tax-advantaged savings, and it can reduce your taxable income for the year.

If you have access to a Health Savings Account (HSA), target maxing out your contributions if at all possible. These accounts are triple tax-advantaged, as they reduce your taxable income, grow tax-deferred, and can be distributed tax-free for health expenses in the future.

Of course, for anyone over age 73, don’t forget your Required Minimum Distributions (RMDs) from your pre-tax retirement plans (i.e. 401(k), 403(b), IRA, SEP IRA, Simple IRA). Failure to take these distributions can result in hefty tax penalties.

If you need to take your RMD but don’t need the money for your lifestyle, consider sending it directly to charity! Qualified Charitable Distributions (QCDs) can only be taken from IRAs after age 70 1/2, but the distributions go directly to charities of your choice and will help satisfy your RMD. QCDs are the most tax-advantaged way of giving for individuals who qualify.

Charitable Giving Opportunities

Speaking of charitable giving, that’s our favorite thing at JMA! In some states, like Arizona, dollar-for-dollar tax credits are available, allowing you to redirect your state tax liability toward causes you care about.

If you are on track for a high-income year and you have causes you would like to support, charitable giving could be an ideal solution. Of course, you can give cash, but anyone who has been around JMA for any length of time knows there’s a better way! In the timeless and transcendent words of Tim MacDonald, “Friends don’t let friends give cash.”

Don’t forget about the power of giving appreciated assets, like stock, real estate, or business interests. Our favorite strategy, if you have cash you are planning to give, is to first give away appreciated stock, then use the cash to buy it back! This avoids capital gains, allows you to itemize the deduction, AND increases the cost basis of your investment. A win, win, win!

Another option available to some individuals is “bunching.” This is the strategy of making a substantial contribution to a Donor Advised Fund (DAF) to cover multiple future years of charitable giving. If you’ve been blessed with a particularly good financial year, you could make a large, tax-deductible contribution to a DAF and spread the grants to the desired non-profits over the next number of years. This allows you to accelerate the tax benefit to the year you need it and fund your future giving over time.

Advanced Tax Strategies

There may be times when lowering your tax bill is not your only goal. Sometimes it even makes sense to pay a little extra. For example, suppose your income is inconsistent and you have low earnings this year but anticipate a higher income next year. In that case, it might be worth executing a Roth conversion to accelerate normal income at a lower income tax bracket.

Another year-end strategy that may apply is tax loss harvesting, which allows investors to offset the gains that have been realized by selling underperforming securities at a loss. If your capital losses for the year exceed your capital gains, you can deduct up to $3,000 in net losses against your ordinary income. Any losses exceeding that $3,000 can be rolled forward for use in future tax years.

On the flip side of tax loss harvesting, if you have an existing tax loss for the year, you could consider harvesting some gains. This year has produced some strong returns for equities, and you may want to realize some gains to offset and use some of your losses.

These are just a few of the strategies we employ at JMA. Every situation is unique, so we encourage you to reach out to your financial advisor for more information on what’s right for your circumstance. We can also provide you with a tax snapshot that will summarize your investments, income, and assets for this year so you’re prepared for the road ahead.