Smart Year-End Tax Moves to Consider

As the end of the year approaches, take time to review your financial situation and make smart moves to help optimize your tax outcomes. Here are some year-end tax strategies that may help you save on taxes and set yourself up for a strong start in the new year.

1. Lowering Your Taxable Income

• Max Out Contributions to Pre-Tax Accounts

  • Consider making additional contributions to your pre-tax retirement accounts, such as an IRA, 401(k), or SEP IRA. These contributions can reduce your taxable income, potentially lowering your tax bill. Check the contribution limits for your specific account type to maximize this tax benefit.

• Use Tax-Loss Harvesting

  • Tax-loss harvesting is a tax strategy that involves selling nonprofitable investments at a loss to offset or reduce capital gains taxes incurred through the sale of investments for a profit. Consider selling depreciated securities that no longer fit your strategy, have poor prospects for future growth, or can be replaced with similar investments that play a similar role in your portfolio.

• Contributing to Tax-Advantaged Accounts

  • Contributions to a 401(k), 403(b), or a health savings account (HSA)¹ could potentially lower your taxable income for this year and increase the assets you have available for future retirement and medical expenses. It’s a good practice to review your contributions before year-end to ensure you’re taking full advantage of the limits for these accounts.

2. Maximizing Your Charitable Deductions

• Make Qualified Charitable Distributions (QCDs)

  • If you’re 70½ or older, you can donate up to $100,000 directly from your IRA to a charity using a QCD². This allows you to satisfy your RMD without adding to your taxable income—a great way to support causes you care about while saving on taxes.

• Make Charitable Donations

  • Donating to charity can offer tax benefits, especially if you itemize deductions. You can usually deduct cash donations up to 60% of your adjusted gross income (AGI). Donating appreciated investments, like stocks, can be even better because you avoid paying capital gains tax and can deduct the full market value (up to 30% of your AGI).³

3. Reducing Exposure to Future Taxes

• Take Required Minimum Distributions (RMDs)

  • If you’re 73 or older, you must take RMDs from your tax-deferred accounts before year-end. Missing this deadline could mean a 25% penalty on the amount you didn’t withdraw, so it is crucial to take your distributions on time.⁴

• Consider a Roth Conversion

  • If you can’t contribute directly to a Roth IRA due to income limits, think about converting some of your Traditional IRA savings to a Roth IRA. This allows for tax-free withdrawals in retirement but be careful not to convert too much—doing so could push you into a higher tax bracket.

• Annual Exclusion Gifts

  • You can make gifts up to $18,000 to as many beneficiaries as you like⁵, which can help reduce your estate’s value without using any of your lifetime gift and estate tax exemption.

4. Planning for Next Year’s Taxes

• Review Your Investment Holdings

  • Look at your stocks, bonds, mutual funds, ETFs, and other investments. High turnover in these assets can lead to extra taxable income. Adjusting your investments now can help you manage taxes and meet your long-term financial goals.

• Check Your Asset Allocation and Diversification

  • Review how your investments are spread among and within asset classes to ensure they align with your goals and tax strategy for next year. Balancing your investments properly can help minimize taxes and boost growth.

• Keep a Long-Term Perspective

  • The market is always fluctuating, but maintaining a long-term view can help you navigate through periods of volatility. Historically, despite short-term ups and downs, the market has shown an upward trend over time. Staying focused on your long-term goals can help you weather market volatility and achieve your financial objectives.

5. Meet with a Wealth Advisor

• Schedule a Year-End Consultation

  • To ensure your financial plan aligns with your goals, consider meeting with a Wealth Advisor. They can help you reevaluate your financial plan and develop a tax strategy for the new year.

Year-end tax planning can feel complex, but you’re not alone. Consider speaking with a tax professional or a Wealth Management by CommunityAmerica Wealth Advisor to help you with your year-end planning.