Seven Year-End Tax Planning Strategies
Austin Carroll is a financial advisor at Cornerstone based in Reno, NV. Austin has passed his Series 65 Securities Registration Examination. He helps clients create customized financial plans based on their unique financial goals by addressing topics such as income, investments, and taxes.
SEVEN YEAR-END TAX PLANNING STRATEGIES
At the end of every year, as many of you know, we tend to ratchet up communications to discuss tax planning strategies, such as Roth conversions. While we do believe that Roth conversions will help most of you to pay less in taxes and create a better legacy for your heirs, it’s not the only strategy you should be looking at for tax planning.
1. TAX RETURNS
The first thing you should do is get that tax return over to your advisor. Tax returns help us see where the income is coming from and whether you are in a lower income tax bracket that maybe you normally wouldn’t be in. If I see that a client is typically in the 22% bracket but for some reason this year, they are only in the 12% bracket, we should look at taking advantage of that lower income for the year.
2. TAX LOSS HARVESTING & TRADING
This is more advanced tax planning that looks back at the tax returns mentioned above and maybe includes a carryover loss. We want to be able to take advantage of that loss and maybe that includes realizing the capital gains on an asset and resetting the cost basis on your favorite stock. One important thing to remember is to ensure that the carryover losses are listed in the younger and healthier spouse’s name. This is because once that spouse passes away, the losses disappear as well. The good news is, because of the unlimited gift exemption for spouses those losses are easily transferred.
3. MAXIMIZING RETIREMENT ACCOUNT CONTRIBUTIONS
Every year you are still working, meaning you have earned income, you can contribute to those retirement accounts. While there are many different types of retirement accounts and they all have their own unique rules, most workplace retirement accounts will allow you to contribute up to $22,500 for the 2023 year. Unless you are over age 50 and then the limit is $30,000. This does not include the contribution to your IRA and Roth IRA outside of the workplace plan at $6,500 for those under 50 and $7,000 for those aged 50 and over. So, make sure you are funding your accounts because this ties into the points listed above as well.
4. ROTH CONVERSIONS
Many of you probably already have a Roth conversion plan that was developed by sitting down with your advisor and creating a strategy that should help you pay less taxes over your lifetime. Maybe your motivation for doing those Roth conversions is to pay less in taxes or to help your heirs inherit money tax-free, but the important part is that you need to do those conversions in the same calendar year that you want to realize them, so don’t wait to the last minute.
5. RMDS & QCDS
RMDs, or required minimum distributions, are those annual distributions that the IRS tells you that you must take out of your tax-deferred accounts every year and realize as earned income. QCDs though, are qualified charitable distributions. The reason that I bring them up together is because the QCD can be used to effectively offset the RMD up to $100,000 and help lower your AGI (adjusted gross income). If you have charitable intent, this could be an effective tax planning tool for you, just remember to do the QCDs before taking the RMD.
6. HIGHER INTEREST RATES
These last two are more indirectly tied to tax planning because they essentially raise the cost of living for some individuals. If you look back to pre-COVID, we had ultra-low interest rates, and some people used that to their advantage by taking out home equity loans or refinancing but now, some of those same loans are up to 7-8%. This dramatically changes the cost of servicing that loan and can quickly eat up a monthly budget.
7. HIGHER INFLATION
Echoing the same sentiment as above, with higher inflation comes higher prices. Couple this with the higher interest rates, and a lot of people are starting to feel real pain when it comes to retirement planning. This forced their hand to take more money from their IRA or 401(k) and that just creates more income taxes.
WHERE TO GO FROM HERE
You can see how all this ties together and why it’s important to address these issues at the end of every year with your advisor. To see how Cornerstone can incorporate year-end tax planning strategies into your retirement portfolio, call our office at (775)853-9033.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.
This information should also not be considered tax or legal advice. Individuals should consult with a professional specializing in the fields of tax, legal, and accounting regarding the applicability of this information for their situation.