Tis’ the Season for…
Year-end Planning Strategies

With the holiday season underway and year-end right around the corner, thinking about taxes may seem like the furthest topic from our minds. Let’s face it, Santa Claus and holiday shopping get most of the limelight right now. While tax season technically doesn’t “start” until early next year, the last month of the year is 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 2022 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 Rule and 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?” To add to that thought, 2022 has not exactly been the best year for gains in financial markets. However, if you do have gains in a taxable account, then there are three key reasons why you may consider harvesting gains: (1) if you already have realized losses this year (or carry-forward losses from prior years) to help offset gains and want to sell all or a portion of appreciated securities, (2) you expect to be in a lower tax bracket this year and can afford to realize more taxable capital gains than usual without bumping yourself up into the next tax bracket, and/or (3) you expect tax rates (both your personal income tax rate as well as capital gains tax rates) to increase in future years. If this does come to fruition in future years, then taking gains this year becomes more strategic because you are technically “locking in” at lower tax rates.

3.) Convert your IRA (or a portion) to a Roth IRA

This is a hot topic in the industry right now, especially given that Roth conversions become more attractive when financial markets are down like we have experienced (painfully) this year. Essentially, when your IRA account value is lower because stock/bond prices have fallen, then you can technically convert a higher percentage of your account (if not all of it) with a similar, if not potentially lower, tax liability.
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, not capital 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

In addition to the “feel good” factor of donating to your favorite charitable organizations, gifting to charity also provides tax benefits. First and foremost, gifting to charity provides an immediate charitable deduction, which can help reduce taxable income for the year if you are able to itemize. For those expecting larger than usual taxable income for the year, a strategy called “bunching” may be considered, which is where you concentrate or “front-load” your charitable contributions into one year to generate an even larger charitable deduction. Additionally, 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 tax impact 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 $20,500 or $27,000 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 their college 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. 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, please do not 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 discuss strategic ideas and simplify your planning!

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Sources:

• Investor.gov: Wash Sales
• Nerd Wallet: 5 Top Benefits of a Roth IRA
• Renaissance Charitable: Why a Donor-Advised Fund?