As year-end approaches, it can be critical to evaluate your tax situation and identify strategies to implement.
But, while there are many tax strategies to consider, it’s essential to know that different strategies will work better in certain financial situations. For example, while Roth conversions can be a powerful tax strategy for someone in early retirement with a year or more of low income, that strategy may not be suitable for a high earning professional at the peak of their career.
So, when deciding which strategies to use and how to find the best 401(k) for doctors, understand your financial situation first to ensure it’s the right fit.
Here Are 3 Year-End Tax Planning Strategies to Consider
1. Harvest Gains or Losses in Your Taxable Investment Account
2022 was a challenging year for investors, with many stocks down 20 to 30% from all-time highs.
But, like many trials, there may be a silver lining. For your investment accounts, that silver lining could be tax-loss harvesting. At a high level, tax-loss harvesting is a tax strategy where you sell your investments at a loss to create a tax offset, then repurchase a different investment immediately or wait 30 days to repurchase the same investment.
This tactic can generate paper losses to help lower your tax liability while ensuring you continue to invest for the future. Those losses can be used to offset capital gains up to any amount or to lower your ordinary income by $3,000 per year. Then, any excess unused losses can be carried forward to future years indefinitely. This can be an excellent strategy for savvy investors with losses in a taxable brokerage account looking for a deduction.
Alternatively, some investors may choose to harvest gains instead of losses. This can be an excellent strategy for investors with gains in their taxable accounts and a low-income year where they want to take advantage of low tax brackets. Unlike tax-loss harvesting, when you’re harvesting gains, you can sell and then rebuy the same investments immediately, creating a paper gain and stepping up your cost basis in the process. This can allow you to take advantage of low or zero capital gains rates depending on your income for the year.
Either way, it’s important to note that the current year’s deadline for harvesting gains or losses is always December 31st. Anything done after that date will be counted on the following year’s tax return.
2. Contribute to Retirement Accounts Before Year-End
Next, consider making contributions to retirement accounts before year-end.
When contributing to an employer-sponsored retirement plan like a 401(k) or 403(b), all employee contributions must be completed by December 31st. For those in a high tax bracket now who expect to be in a lower tax bracket during retirement, traditional or “pre-tax” contributions can be valuable. These contribution types lower your taxable income now in exchange for paying taxes on the distributions during retirement.
Alternatively, those in a low tax bracket now anticipating higher taxes during retirement may choose to prioritize Roth contributions. Roth, or “after-tax,” contributions mean that you paid the tax on your contributions up front in exchange for tax-free withdrawals during retirement. This allows you to lock in your tax bracket today and never pay taxes on the amount again.
In addition, if you choose to contribute to an IRA or HSA, you have until your tax filing deadline (not including extensions) to complete those contributions. For example, you have until April 18th, 2023, to make your 2022 IRA or HSA contributions.
3. Consider Donating to Charity
Lastly, consider the tax benefits of donating to charity if you’re charitably inclined.
Your charitable donations can create valuable tax savings, depending on your tax situation. But, to utilize those tax savings, you must have enough itemized deductions (mortgage interest, taxes paid, charitable donations, and more) to surpass the standard deduction. And with the increase in the standard deduction under the 2017 Tax Cuts and Jobs Act, fewer taxpayers are claiming itemized deductions.
But if your donations are falling short, there may be one strategy to consider — bunching.
Bunching involves donating multiple years’ worth in a single year, increasing your deductions enough to surpass the standard deduction, then taking the standard deduction during non-bunching years. This strategy can increase your total deduction over multiple years while donating the same amount to charity. All you need to do is make sure you donate within the proper year by keeping an eye on the December 31st deadline.
IMAFS Is Here to Help
If you are interested in working with a fiduciary CFP® expert to take advantage of year-end tax tactics and a customized investment portfolio to achieve your financial objectives, then IMAFS can assist you.
With locations in Salt Lake City, Logan, St. George, and Boise, IMAFS is among the leading firms offering wealth management for doctors in Utah and Idaho. At IMAFS, we are committed to helping our customers create long-term wealth while increasing their enjoyment of their wealth. To do this, we match each client with a devoted CFP® expert supported by an exceptional team. Contact us to schedule a consultation!