Oct 06, 2021 | insights

As the Year Ends, Your Tax Planning Begins

By Kevan Melchiorre, CFP®
Co-Founder & Managing Partner
Tenet Wealth Partners


As we head towards the end of the year, thinking about taxes may seem like the furthest thought from our minds, especially with the holiday season right around the corner. I know that in our house, once November 1st hits, it is all about turkey and Santa Claus for the rest of the year. While tax season technically doesn’t “start” until early next year, the last couple of months of the year are actually an excellent time to take stock of your current tax situation and strategize around minimizing your tax bite this year, next year, and/or beyond.

With that in mind, there are several options to consider when it comes to taxes. Of course, it does bear mentioning that anything you do should depend on your specific situation and there is no “one-size-fits-all” tax plan!

Here are several year-end tax planning considerations for 2021 and beyond:

1.) Harvest capital losses in your taxable investment accounts (i.e., brokerage, individual, joint, or trust investment accounts)
If you have any securities trading at a loss, selling those can help offset realized capital gains you’ve already taken, which would have otherwise been taxable. For example, let’s say you have $10,000 of realized capital gains from sales this year. Harvesting losses could offset a portion (or possibly all) of that amount, which could save you hundreds, if not thousands, of tax dollars. Even if you don’t have any realized gains to offset, the losses you generate can still help. You are able to take up to $3,000 of realized losses as a Capital Loss Deduction, and then any additional losses above that can be carried forward to use in future years. One final important note: harvesting losses does not require you to just park the sales proceeds in cash. You can actually reinvest the proceeds into something else, even something similar, so that money is still working for you. You just want to avoid selling and then reinvesting back into the exact same security in the near term, which would trigger the Wash Sale Ruleand disallow the loss.


2.) On the flip side of the above, harvest capital GAINS 
So this one may seem counterintuitive and you may be thinking “why would I do this if capital gains create MORE taxes?” Two reasons: (1) if you already have carry-forward losses to help offset gains (as explained above) and want to sell all or a portion of appreciated securities, and/or (2) you expect capital gains tax rates to increase in the near future. If these tax rates are expected to increase, then taking gains this year becomes more strategic because you are technically “locking in” at lower capital gains tax rates. With the threat of tax reform on the horizon, including higher capital gains tax rates for some, this could be advantageous to consider.


3.) Convert your IRA (or a portion) to a Roth IRA
  • This is a hot topic in the industry right now with the threat of higher taxes in 2022 and beyond, which makes the case for converting while tax rates are lower. In fact, part of the proposed tax reform bill that was recently released includes a provision to eliminate Roth conversions for high-income earners starting 1/1/2032, so the opportunity to do conversions may be more limited in the future.

  • As a refresher, a Roth conversion is a taxable transfer of either a portion, or all, of your Traditional IRA into a Roth IRA. Since Traditional IRAs are tax-DEFERRED, the amount that you convert becomes taxable at your ordinary income tax rates. In return, Roth IRAs offer the potential for tax-free growth as well as tax-free distributions in retirement. They also do not have required distributions at age 72 like Traditional IRAs and 401(k)s, so not having these can technically help save on future income tax.

  • Given that Roth conversions are taxable at your ordinary income tax rates, notcapital gains tax rates, the corresponding tax impact could potentially be sizeable depending on how much you convert. Also, converting a large amount could push you up into the next tax bracket, so proper tax bracket management and planning is critical.


4.) Gifts appreciated assets (or cash) to charity
  • Gifting to charity provides an immediate charitable deduction, which can help reduce taxable income for the year if you are able to itemize. For 2021, a provision of the CARES Act was extended that provides a $300 (or $600 if married filing jointly) charitable deduction for cash gifts (even if you don’t itemize), or a 100% of Adjusted Gross Income deduction if you DO itemize. Given this is likely the last year to take advantage of these, it may make sense to make larger charitable contributions if it makes sense for your situation. In fact, some may even consider a strategy called “bunching,” where you concentrate or “front-load” your charitable contributions into one year, providing for an even larger charitable deduction. Also, for those taking Required Minimum Distributions (RMDs) from their Traditional IRAs, gifting all or a portion of your RMD directly to charity removes that amount from your taxable income.

  • In terms of how to give, the two main ways are gifting cash OR appreciated securities (i.e., stocks, mutual funds, ETFs). A gift of appreciated securities has multiple benefits including a charitable deduction, removing the assets from your estate, and removing a potentially large capital gains tax bill if you were to keep the stock and sell at some point.In addition to gifting directly to the charity, some may consider creating a Donor Advised Fund, which is a charitable giving account that allows you to take advantage of immediate charitable deductions when you add to it, but provides more flexibility, simplicity, efficiency, and personalization.

  • Charitable contributions can be used strategically in combination with other strategies, such as a potential Roth IRA conversion. Gifting more to charity provides a larger the charitable deduction, which allows you to potentially reduce or contain the taximpact from these types of events.


5.) Maximize contributions in your retirement account at work 
Deferring a percentage of your income into a qualified retirement account, such as a 401(k), helps reduce your taxable income for the year as those contributions are pre-tax. The other benefit is the potential for tax-deferred growth while the money is invested in the account. This is a great consideration if you have not “maxed out” your contributions for the year (i.e., for a 401k, you can defer up to $19,500 or $26,000 if age 50 and up). This can work great if you are expecting a year-end bonus to be paid before 12/31.

6.) Contribute to a College Savings account for your child or grandchild 
If you have kids, or grandkids, you can not only help save for theircollege education but also potentially receive a deduction on your state income taxes. In Illinois, you can deduct up to $10,000 of contributions per year ($20,000 if married filing jointly), and then those contributions have the opportunity to grow tax-free while invested.

December 31 will be here before we know it, so now is the time to think through strategies that could reduce your tax bill in April. This year may be even more critical to consider making moves with the potential for tax reform before year-end. Of course, the above points are only a subset of the possibilities, and our team at Tenet can help personalize your planning specifically to your situation and needs. As always, don’t hesitate to reach out to us with questions or as you need assistance, and we also highly recommend consulting with your tax advisor before proceeding with any strategies. It helps to have partners to bounce ideas off of and simplify your planning!


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