As the holidays approach, so does tax-planning season. Although tax planning is an ongoing process, the year-end is a great time to review your finances and implement strategies to reduce your yearly tax burden.
This year looks a little different, as many of the typical end-of-year tax strategies are uncertain right now. As congress debates where they will get the money for their $3.5 trillion spending package, we don’t know which strategies will still be effective when filing time rolls around. Because of this, you may be feeling uncertain of how to move forward with year-end tax planning.
However, regardless of what decisions are made in Congress, there are ways you can reduce the tax bill you receive next year. Moreover, the potential for significant changes to the tax law means that right now may be an even more critical time to conduct a year-end tax review. Therefore, consider the following tax-minimization strategies as you wrap up 2021.
To get the most out of your retirement accounts, you may already contribute the limit each year. However, if you are maxing out those accounts already, it is possible that participating in a Roth or Backdoor Roth conversion may assist in lifting your tax burden.
A Roth conversion involves transferring funds from a traditional IRA or 401(k) account into a Roth account. If you can do this during years when you are in a lower tax bracket than you will be in the future, you could potentially save yourself from heavier taxes.
If you are above the income limit for contributing to a Roth account, you may want to consider the Backdoor Roth strategy. This is where you max out contributions to a non-deductible IRA and then convert the account into a Roth account. It could save you quite a bit down the road when you can withdraw those funds tax-free.
Roth conversions can be a complex process and can be helpful depending on your financial situation. Consult with your planner before you engage in these strategies.
Another strategy is to “bunch” deductions. This can be especially effective with charitable giving; instead of donating your set amount every year, you “bunch” several years’ worth of giving into one calendar year.
By doing this, you can reduce your taxes in a given year by taking a large amount of itemized deductions in one year and taking the standard deduction in another. Careful planning with your advisor can ensure that this strategy is used most effectively.
Tax-loss harvesting is another strategy that could prove beneficial, especially if you have had a year with either high gains or significant losses. This strategy lowers your tax liability by selling losing assets such as mutual funds, stocks, and bonds. You then use those losses to offset your capital gains, resulting in a reduction of the capital gains taxes you owe.
Wait It Out and Watch
After you have done everything, you are able to implement tax-minimization strategies; all you can do is watch and wait. Then, work closely with your financial planner so that if the tax law changes, you have a plan to work together to minimize your tax burden effectively.
We Are Here to Help
At Idaho Medical Association Financial Services, we are with you through every step of your financial planning journey, including investment strategies for physicians. As a leading medical wealth management firm, we work with you to create an Income Tax Plan that you can have confidence in. Call for a consultation today to see how we can assist you in reaching your financial goals.