5 Year-End Tax Planning Opportunities for the Savvy Investor
Presented by Kristen Smigelski, CFP®, RICP®
Following a solid tax planning strategy throughout the year is an integral part of any financial plan, but there are special considerations to make as the year comes to a close that can help maximize your refund or minimize your liability.
Are you taking advantage of the following tax-saving strategies with your return?
- Maximize Retirement Contributions to Traditional IRAs
Far too many taxpayers fail to take advantage of their annual retirement contribution limits and miss out on reducing their taxable income. Traditional IRA contributions are made with pre-tax dollars and aren’t taxed until withdrawal, so maximizing contributions could actually keep some individuals from running over into a higher income tax bracket. Contributions to 401(k)s and 403(b)s must be made by December 31st to impact your 2020 taxes, but the deadline for making traditional IRA contributions is April 15, 2021.
- Contribute to Charity
Donating to your favorite charity is a surefire way to reduce your taxable income, but there are a number of options to explore.
- Donate cash or goods to a qualifying charity. Collect and file all receipts with your return.
- Contribute to a Donor-Advised Fund (DAF). This strategy allows donors to allocate a lump sum of funds to be distributed to various charities over multiple years. This works especially well if the individual has earned a higher than average income and is looking to offset the increased income right away.
- Donate your Required Minimum Distribution (RMD). Owners over age 70 ½ can transfer up to $100,000 tax-free directly from their IRA to a qualified charity. Keep in mind that charitable contributions can only be made from IRAs, so you may need to first perform a rollover if you’re looking to use funds from a non-qualifying account.
- Defer Income
For business owners, deferring income is an essential factor in year-end tax planning. Think of which items or expenses you may be able to pay out after the new year, such as employee bonuses or income paid to yourself. Pushing these expenses out will be especially helpful for those who anticipate earning less income the following year.
- Take Deductions Early
The other side of the business planning strategy is accelerating expenses that can be used as deductions in the current year. For example, if you know you will be hiring an outsourced vendor in January, you may request to pay for their services in advance in order to deduct them from your current year’s income. Other deductions could include interest payments or medical deductions.
- Tax-Loss Harvesting
This strategy involves intentionally selling investments at a loss in order to offset (a) capital gains that resulted from selling securities or (b) up to $3,000 in non-investment income. However, there is a limitation to this practice. In order to prevent taxpayers from taking advantage of this perk, the IRS implements the “wash-sale” rule which nullifies a loss claim if the same or nearly identical security is re-purchased within 30 days of the sale.
Like with any plan worth implementing, preparation is essential—especially when time-sensitive moves and deadlines are involved.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.