Tax Planning Strategies

It is always a good idea to periodically review your tax situation to identify opportunities to reduce your tax liability and strengthen your overall financial strategy. Proactive tax planning throughout the year can help ensure you are taking full advantage of available planning opportunities. Here are several items that may warrant consideration each year:

• Make charitable contributions using appreciated securities instead of cash.
  Many charitable organizations, including universities, churches, and other nonprofit organizations, accept gifts of stocks or mutual funds. In addition to supporting a worthy cause, donating appreciated investments may allow you to avoid capital gains taxes while receiving an income tax deduction (if you itemize) for the full value of the gift. You may also want to consider a Donor Advised Fund, which allows you to contribute cash or appreciated securities, receive a deduction in the year of the contribution (if you itemize), and distribute funds to charities over time.

• Consider a Roth conversion.
  For individuals who have significant deductions relative to income or find themselves in a lower-than-usual taxable income year, converting a portion of a traditional IRA to a Roth IRA may be advantageous. This strategy can allow you to move assets into a Roth account—where future qualified distributions are tax-free—while potentially paying taxes at a lower rate. Roth conversions may also be beneficial for those who wish to “fill up” a lower tax bracket or who anticipate higher tax rates or income in the future.

• Realize investment gains to take advantage of favorable capital gains tax rates.
  Taxpayers in lower income brackets may be eligible for reduced or even zero federal tax on long-term capital gains. Reviewing taxable investment accounts (not retirement accounts) to determine whether realizing gains makes sense can be a valuable year-end planning opportunity.

• Harvest tax losses in your investment portfolio.
  If you have unrealized losses in taxable investment accounts, selling those positions may allow you to offset capital gains realized during the year and potentially reduce your overall tax liability. Proceeds can be reinvested in other investments to maintain your portfolio allocation.

• Maximize contributions to employer-sponsored retirement plans.
  Contributing to a 401(k) or other employer-sponsored retirement plan can reduce your taxable income and increase long-term savings. Annual contribution limits vary by plan type and are adjusted periodically, so it is important to review the current limits and your contribution levels before year-end.

• Review tax withholding and estimated payments.
  Ensuring your tax payments are sufficient throughout the year can help you avoid underpayment penalties. Reviewing your withholding and estimated payments before year-end allows time to make adjustments if needed.

 For our clients, we review these strategies—and others—as part of our year-end tax planning process, always in the context of your overall financial plan. If you have questions about your specific tax situation or would like to discuss any of the strategies outlined above, please contact our office.