Taxes are an important consideration when it comes to managing your finances. Being proactive with your tax planning can help you manage your obligation and put you in a better financial position for the future. Here are some tax planning tips you may be able to take advantage of this year. Be sure to consult with a tax professional or financial advisor to maximize your strategy.
Harvest Investment Losses
Do you own any investments that have lost money this year? If so, you may be able to sell them before the end of the year and claim a deduction from your income taxes by tax-loss harvesting.
Tax-loss harvesting entails strategically selling investments to realize a controlled amount of losses and then using those losses to offset the taxable gains you’ve realized over the same period. After harvesting losses, consider replacing the assets you sold with others that complement your financial goals. Those replacements must meet certain requirements, though. As part of the wash-sale rule, the IRS imposes a 30-day waiting period from the time of sale before you’re able to purchase a “substantially identical” asset to the one you sold.1 Failure to meet these requirements may preclude you from claiming your investment losses for tax purposes.
This can be a useful strategy for realigning your portfolio but it’s often complex to implement, so be sure to consult with a financial professional.
Maximize Contributions to Tax-Advantaged Accounts
Tax-advantaged accounts like IRAs, employer-sponsored 401(k)s, Health Savings Accounts (HSAs), and 529 college savings plans offer unique tax incentives for investing toward long-term goals. Making use of these different accounts can provide you with tax savings while helping you stay on track to hit important financial milestones like your retirement or your child’s education.
There are annual contribution limits associated with each account. If you’re over the age of 50, you may qualify for “catch-up” contributions that allow you to contribute more. Some employers offer to match a portion of your 401(k) contributions and if your employer is one of them, consider contributing enough to your 401(k) each pay period to maximize your employer match.
Make Annual Gifts
The annual gift tax exclusion designates the amount you’re allowed to gift others (such as your children or grandchildren) each year on a tax-free basis without those gifts counting against your lifetime gift tax exemption. This tax exclusion can be a tax-efficient way of passing assets down to your heirs.
Gifts are priced based on their fair market values for tax purposes, not the cash values you acquired them for. There’s no limit to the number of people you can make these annual gifts to, meaning you can give up to the annual limit to each of your children and grandchildren if you choose to.
Give to Charity
Donations to qualified charitable organizations can be deducted from your income taxes and potentially lower your tax burden for the year those donations are made. Charitable gifts can be made with cash or other financial assets like stocks, bonds, or even real estate. As an alternative to simply making a donation, you can consider using a Donor-Advised Fund (DAF) or private foundation to support the causes you believe in.
If you’re currently taking Required Minimum Distributions (RMDs) from an IRA, 401(k), or another tax-deferred account, you have the option to donate directly from the account to a qualified charity of your choice instead of claiming the RMD as income.
Claim Other Deductions and Credits
In many cases, itemizing deductions on your taxes can be more advantageous than simply claiming the standard deduction. In addition to the various deductions you may receive for contributing to tax-advantaged accounts or making charitable distributions, there are countless expenses that may entitle you to further deductions or tax credits this year. A financial advisor can help you decide what to itemize on your tax return.
Of course, you may still decide to claim the standard deduction if it’s greater than the value of these items.
Work With a Professional
In preparation for the next tax season, consider working with someone who can help position the various elements of your financial plan in a tax-efficient manner. A tax or financial professional can help you navigate the complexities of tax planning and identify areas where you might be able to save.
To learn more about your tax planning options or discuss how some of these strategies may fit into your larger financial plan, connect with us at your convenience.
1 “Publication 550 (2021), Investment Income and Expenses.” Internal Revenue Service. Accessed February 10, 2023. https://www.irs.gov/publications/p550#en_US_2021_publink100010601.
