As this year draws to a close, explore these six actionable tax planning ideas to optimize your finances for the upcoming year.
With the end of the year approaching, it’s a perfect time to consider various tax planning strategies to help optimize your financial situation next year. It’s not too late to maximize retirement plan contributions, donate to charities, and consider other actions for reducing the burden when tax time rolls around. Here are six actionable tax planning ideas as we close out the calendar year.
Conclude the year by reviewing your portfolio with your wealth advisor and discussing whether it makes sense, based on your goals, to sell underperforming assets for a loss. One tactic is to sell both winners and losers to offset gains with losses: tally any gains, then cash out losing positions of equal or greater value. If losses are more than gains, you can deduct up to $3,000 of those losses (and carry over additional losses to future years). Up to $3,000 of losses in excess of gains can also be used to offset ordinary income from other sources.
Keep in mind that the wash-sale rule prevents an investor from taking a loss on their taxes if the same security (or one considered substantially identical) is purchased within 30 days of the trade that created the loss. The IRS designed this rule to prevent investors from selling a security to realize a capital loss for tax purposes and then immediately buying it back to maintain the investment position.
Take time to review the charitable contributions you’ve made this year and consider making more. Cash donations to qualified charities can be deducted up to 60% of adjusted gross income (AGI). While money and personal checks are commonly used for donations, people who itemize deductions can also donate other assets and deduct their full value.
If you have a stock that’s been held for longer than one year, determine whether it has appreciated or depreciated to find the optimal way of donating it.
Contributing appreciated long-term investments to a donor-advised fund can also help you support a favorite cause while optimizing tax efficiency. You can avoid capital gains recognition and claim a tax deduction for the entire fair-market value of your donation, typically up to 30% of AGI.
Beyond charitable contributions, when you give an asset—such as cash, stock, or vehicle—the IRS will likely want information and potential tax payments. The good news is your gift or estate can be exempt from taxation through several methods for tax-free transfer:
For those age 72 and older, it’s essential to complete required minimum distributions (RMDs) from tax-deferred retirement accounts by year’s end. Missing the deadline can result in a hefty 25% penalty on the RMD portion not withdrawn.
If you’re 70½ or older, you can donate up to $100,000 to a charity directly from your individual retirement account (IRA) using a qualified charitable distribution (QCD). There’s no tax deduction for the donation, but the contribution can satisfy minimum distribution requirements without adding to taxable income.
A strategy using Roth retirement accounts can sometimes make the most of savings while minimizing your tax bill. With a Roth account, it’s key to consider that unlike a traditional IRA funded with pre-tax dollars, contributions to a Roth account are made with after-tax dollars. However, distributions and earnings can be withdrawn tax free at retirement, and Roth IRAs aren’t subject to RMDs. Beginning in 2024, the exemption from RMDs will be extended to Roth 401(k), 403(b), and 457(b) accounts.
You can still contribute the maximum amount to your tax-deferred employer-sponsored retirement plan, such as a 401(k). Meanwhile, you have until April 15, 2024, to contribute to a health savings account (HSA) or IRA. Your contribution strategy can help defer income to your retirement years when you could be in a lower tax bracket.
A 529 plan is a savings account that helps families pay for education expenses. While contributions aren’t deductible for federal tax returns, many states offer a deduction for contributing to a qualified 529 plan up to a certain dollar amount, and earnings on the contributions can grow tax free (if withdrawn for qualified expenses).
With the tax-filing deadline months away, it’s not too late to take proactive steps to manage your tax bill before the year’s end. In fact, some tasks shouldn’t wait until next year; seize valuable opportunities now to give to charities or reduce the amount of taxes owed. As always, we’re here to help. Reach out to your advisor and let’s find which strategies make the most sense for your financial plan and long-term goals.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.