Tax Strategies

Optimizing Your Tax Strategy Before Year-End: A Quick Checklist

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As the year wraps up, it’s a great time to take a closer look at your tax planning. If you’ve already built a strong financial foundation, this isn’t just about cutting your tax bill – it’s about making sure your tax strategy supports your bigger financial goals and sets you up for long-term success.

Review Investment Gains and Losses

The final months of the year are an ideal time to evaluate your portfolio. Consider these actions:

  • Harvesting Tax Losses: Offset capital gains by selling underperforming assets if you are in the fifteen or twenty percent capital gain brackets. Be mindful of the wash-sale rule, which prevents you from repurchasing the same or substantially identical security within 30 days.
  • Harvesting Tax Gains: Realize long-term capital gains if you are in the zero percent long-term capital gain bracket and the extra income won’t decrease an Affordable Care Act subsidy or increase the taxable portion of Social Security.
  • Rebalancing Your Portfolio: Realign your investments to target allocations while being mindful of the tax impact. This is also a good time to plan for any new strategies for the coming year.

Maximize Retirement Contributions

Even for those who already contribute regularly, year-end can present unique opportunities:

  • 401(k) and 403(b): Max out contributions, especially if you haven’t yet hit the annual limit. High-income earners may also benefit from catch-up contributions if they are age 50 or older.
  • Backdoor Roth IRA: If you’re over the income limit for a direct Roth IRA contribution, consider converting traditional IRA funds into a Roth. Keep in mind the tax implications of this strategy and how it fits into your long-term tax planning.

Strategic Charitable Giving

Charitable donations remain one of the most powerful tools for high-income taxpayers to reduce taxable income while supporting causes they care about. Consider these strategies:

  • Donor-Advised Funds (DAFs): Contribute a lump sum to a DAF and receive an immediate tax deduction, even if the funds are distributed to charities over several years.
  • Qualified Charitable Distributions (QCDs): If you’re over 70½, consider donating directly from your IRA to avoid recognizing the distribution as taxable income.

Consider Roth Conversions

A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA and paying taxes on the converted amount. This can be advantageous if you expect to be in a higher tax bracket in retirement. Evaluate whether this fits into your overall tax and retirement strategy, particularly if this year’s income is unusually low.

Accelerate or Defer Income

For those with control over their income, such as business owners or high-level executives, timing is critical:

  • Defer Income: Push bonuses or other income into the next year if you anticipate being in a lower tax bracket in later years.
  • Accelerate Income: Accelerate income if you have room left in the ten or twelve percent tax bracket this year.
  • Accelerate Deductions: Prepaying certain deductible expenses like property taxes or mortgage interest may lower this year’s taxable income.

Also, plan for the alternative minimum tax (AMT), which can affect high earners. Review deductions such as state and local taxes (SALT) or incentive stock options (ISOs), which can trigger AMT liability, and adjust accordingly to mitigate its impact. The 2017 Tax Cuts and Jobs Act dramatically reduced the reach of the AMT, albeit temporarily, but the AMT does still exist.

Evaluate Estate and Gift Tax Strategies

With the current federal estate tax exemption set to sunset in 2026, it’s worth revisiting your estate plan:

  • Annual Gift Exclusion: Use your annual gift tax exclusion ($18,000 per recipient in 2024) to transfer wealth tax-free.
  • Lifetime Exemption: High-net-worth individuals may want to utilize a portion of their lifetime exemption now, particularly if legislative changes might reduce it in the future.

Finally, collaborate with your financial advisor, tax professional, and estate attorney to ensure all your strategies work together and are customized to your goals. Tax planning isn’t just about minimizing liability; it’s about making smart financial decisions that strengthen your overall strategy and set you up for lasting success. By taking a few proactive steps now, you can not only feel good heading into tax season but also set yourself up for a strong financial future.

Have questions about how you can wrap up the end of the year? CLICK HERE to make an appointment.

All opinions expressed in this blog post reflect the judgment of Approach Retirement Advisors, LLC (“Approach”) as of the date of publication and are subject to change. The information in this blog post is believed to be factual and up to date; however, we do not guarantee its accuracy. This blog post should not be regarded as a complete analysis of the subjects discussed. This presentation is for educational purposes only and does not constitute personalized investment advice. A professional advisor should be consulted before implementing any of the strategies presented. This blog post should not be construed as an offer to buy or sell or as a solicitation of any offer to buy or sell any securities mentioned herein. Clients and members of Approach may own any securities mentioned herein. Investments are subject to market risks and potential loss of principal invested, and all investment strategies have the potential for profit or loss. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. There can be no assurance that any specific investment will be suitable or profitable for a particular investor’s portfolio. There are no assurances that any portfolio will match or outperform any particular benchmark.

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