As the year draws to a close, savvy investors and taxpayers turn their attention to a crucial financial task: year-end tax planning.  It may be even more top of mind this year with a presidential election approaching and the potential for tax policy changes in 2025 (not to mention the Tax Cuts and Jobs Act sunsetting at the end of 2025 as well).

Tax planning is a proactive approach to managing your tax liability, which can potentially lead to significant savings and help you make the most of your hard-earned money.

The potential for substantial tax savings through year-end planning is extensive with a multitude of possible strategies to consider. A comprehensive approach to tax planning is best to not only evaluate potential deductions or credits but also consider other strategies, such as maximizing retirement account contributions, charitable donations, or tax loss harvesting. Planning decisions you make in the final months of the year can potentially have a meaningful impact on your overall tax picture.

Of course, while there are many different strategies that can be considered, it is important to remember that everyone’s tax picture is different and planning should be personalized for each individual/family. It is also important to not only consult with a trusted financial advisor but also your tax professional. Your tax professional can provide expert guidance on this topic in collaboration with your advisor, or especially if you seek to implement any planning strategies on your own.

With that being said, here are a list of several tax planning strategies that can be considered:

Tax Planning Strategies

  1. Tax Loss Harvesting
    • Tax loss harvesting, as the name implies, essentially means “gathering” losses in a taxable investment account (i.e., brokerage, joint, trust) by selling certain investments that are trading at a loss.
    • By selling investments that have decreased in value, you can then use those losses to offset realized capital gains from other investments, potentially reducing your overall tax liability.
    • If net losses remain after offsetting all of your realized gains, you can use up to $3,000 of those losses to take as a capital loss deduction on your tax return. Any remaining losses above that can then be carried forward to use in future years.
    • Be mindful of the wash-sale rule! This rule prevents you from claiming a loss if you repurchase the same, or a substantially similar, security within 30 days before or after the sale. Instead of leaving sales proceeds sitting in cash to avoid violating this rule, there are alternate methods to consider, such as reinvesting in a different stock within the same or similar sector or reinvesting in a different ETF within the same asset class/sector. However, it is important to understand this nuance, and it is also best to consult with an experienced financial advisor.
  2. Maximizing Deductions and Credits
    • Itemized deductions, such as mortgage interest, property taxes, and medical expenses, reduce your taxable income which can then lead to tax savings. The more you can deduct, the lower your overall tax burden may be.
    • If your deductions fall short of the standard deduction threshold, you may consider bunching deductions into one tax year to exceed the threshold and maximize your tax benefits. For example, if you plan to donate to charity next year, you could consider making an additional, higher donation this year. This can be especially helpful in years of higher expected income.
    • If you’re self-employed or own a small business, home office deductions, business-related travel, and equipment purchases may also help reduce your taxable income. It is important to keep detailed records and receipts to substantiate these deductions.
  3. Retirement Account Contributions
    • Contributions to tax-advantaged accounts, such as 401(k)s, 403(b)s, SIMPLE IRAs, and HSAs, can directly lower your taxable income, offering an immediate tax savings benefit.
    • For those age 50 and over, you can take advantage of catch-up contributions, which allow you to contribute more than the standard limit. For 2024, the catch-up contribution limit is $7,500, which can be added on top of the $23,000 maximum. This not only helps you prepare for retirement but also provides an additional tax benefit.
    • Be mindful of deadlines: 401(k) contributions must be made by December 31st, but contributions to HSAs and IRAs/Roth IRAs can often be made up until the tax filing deadline of the following year (typically April 15th).
  4. Roth Conversions
    • A Roth IRA conversion involves transitioning funds from a traditional IRA into a Roth IRA. The benefit? While you’ll pay taxes on the converted amount, the future growth and withdrawals from the Roth account are tax-free in retirement, making it a powerful strategy for long-term tax savings.
    • Converting in a year of lower expected taxable income can be particularly advantageous, as you’d likely pay taxes at a potentially lower rate. This strategy can be ideal if your income is expected to be quite a bit lower in a given year, and/or you expect to be in a higher tax bracket in the future.
    • Conversions are also a useful tool for those who want to reduce the taxable value of future required minimum distributions (RMDs). Remember that for traditional IRAs, as well as employer retirement accounts such as 401(k)s and 403(b)s, the IRS requires you to take RMDs when you’re 73 (if your birthday is 1/1/51 – 12/31/1959) or age 75 (if your birthday is 1/1/1960 or later). These RMDs are taxable at your ordinary income rate and can be quite substantial if your balances have grown significantly over the years. Converting sooner can help not only shift assets to the tax-free nature of the Roth sooner but may also help reduce that future RMD tax liability.  Not to mention that Roth IRAs do NOT have RMDs!

Charitable Giving and Tax Advantages

Charitable giving is not only a fulfilling way to support your chosen causes but also a strategic tool for tax savings. Given that there are also a few different ways to give charitably, we wanted to highlight a few of them specifically:

  1. Direct Donations
    • Donations to qualified charities are tax-deductible if you itemize deductions. This reduces your taxable income, but you must ensure that your total deductions exceed the standard deduction in order to itemize.
    • For those on the cusp of the standard deduction threshold, bunching charitable donations as referenced earlier (i.e., making multiple years’ worth of donations in a single year) can push you over the threshold and allow you to claim a larger deduction.
    • The IRS allows cash donations to public charities to be deducted up to 60% of your AGI, while donations of appreciated securities are limited to 30%. This can create a significant opportunity for tax savings, particularly if you have a high income.
  2. Donor-Advised Funds (DAFs)
    • A DAF is a flexible, personalized charitable giving vehicle that allows you to contribute funds to a charitable account and then recommend grants to your favorite nonprofit organizations over time.
    • A DAF allows you to make a charitable donation in the current year, take an immediate tax deduction, and recommend grants to charities over time. This provides flexibility in your giving, allowing you to support causes you care about while strategically managing your tax situation.
    • A DAF also acts as a “charitable investment account,” allowing you to manage and grow your contributions over time and do so without having to worry about potential taxes.
    • DAFs can accept a variety of assets, including appreciated securities. By donating appreciated assets, you avoid paying capital gains taxes on the donated securities, further enhancing your tax benefits.
  3. Qualified Charitable Distributions (QCDs)
    • If you are aged 70½ or older, a QCD allows you to transfer up to $105,000 per year (2024) directly from your IRA to a qualified charity. The QCD counts toward your required minimum distribution (RMD), but it is not included in your taxable income.
    • This strategy is particularly beneficial if you don’t itemize deductions but still want to incorporate charitable giving into your tax planning.
    • Keep in mind that QCDs do not allow you to also take an additional charitable deduction for assets donated.

 

Additional Year-End Planning Considerations

Effective year-end planning is not just about implementing strategies but about ensuring they align with your overall financial goals. Consider these final steps to maximize your tax savings:

  • Work with a Trusted Financial Advisor (and One that Specializes in Tax Planning)
    • Tax laws and regulations can be complex, especially with changing rules year to year. A, experienced financial advisor can help tailor these strategies to your unique situation and financial goals.
    • Advisors can provide insight into lesser-known opportunities that may further reduce your taxes, and they can help ensure compliance with all regulations, protecting you from unintended consequences.
    • At Tenet, our team specializes in tax planning and incorporates it into our overall process and financial planning philosophy.
  • Act Before December 31st
    • Many tax-saving strategies, such as tax loss harvesting, charitable contributions, and 401(k) contributions, must be implemented by December 31st to count for the current tax year.
    • Consider giving yourself at least a month or two to plan and then execute before 12/31.
    • Looking ahead to next year, starting early can ensure you have enough time to make informed decisions, avoid last-minute mistakes, and fully maximize your tax-saving opportunities

Wrapping Up

As we’ve explored throughout this article, year-end tax planning can be a crucial opportunity to maximize your tax savings and set yourself up for financial success in the coming year. Considering several of the strategies discussed, such as tax loss harvesting, maximizing deductions and credits, utilizing retirement account contributions, and leveraging charitable giving, you may be able to significantly reduce your tax liability and keep more on your household’s bottom line.

However, it’s important to recognize that effective tax planning is not a one-size-fits-all approach. Everyone’s financial situation is unique with its own set of challenges, complexities, and opportunities. This is where the expertise of a tax professional as well as an experienced financial advisor becomes invaluable. These professionals can provide personalized guidance, helping you navigate the complexities of tax laws and regulations while ensuring that your tax strategy aligns with your overall financial goals. They can identify opportunities you may have overlooked and help you avoid potential pitfalls that could cost you in the long run.

As year-end approaches, take a proactive approach and begin your tax planning if you have not done so already.  Feel free to contact us or schedule a meeting to learn more and/or discuss how our team at Tenet can help!

 

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

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