November 27, 2023- The holidays are now in full swing, which means year-end will be upon us soon. In addition to everything there is to enjoy about this time of year, it is also important to review and implement tax-planning strategies.

While there are many items to consider and plan for, here are some that stand out:

1) Is this a good time for a Roth conversion?

While we can’t predict future tax rates, we do know that current tax rates are historically low. This means it may be a good time for a Roth conversion. The idea of paying more taxes now to save taxes later is hard to stomach, but depending on your situation, it may be a worthwhile strategy. You must consider your projected taxable income this year and what it will look like in future years. If you are currently in a “tax valley” (where your current tax bracket is lower than it has been or will be) then this is worth discussing with your tax advisor.

2) How can I give to charity in a tax-efficient way?

More charitable contributions are made in December than in any other month. It is the time to evaluate how much you are going to give this year to your church or favorite charity. It is also the time of year to review your tax projections to see if bunching deductions or establishing a donor-advised fund is best for your situation. (Note: For more details on tax-efficient charitable giving, see How the Government Can Subsidize Your Charitable Giving.)

3) How is a qualified charitable distribution a great charitable giving strategy?

If you are 73 or older, make sure you have taken any required minimum distributions for the year. Those 70½ and over should evaluate if qualified charitable contributions could work well for your situation. If you are 70½ or older and charitably inclined, giving through a qualified charitable contribution (donating directly out of your IRA) is a highly tax-efficient way to give to charity.

4) Should I give money to my heirs?

If you anticipate estate taxes being a problem for your heirs in the future, you may consider using your annual gift tax exclusion each year to move assets out of your estate. The lifetime gift and estate tax exemption is currently $12,920,000, but this is set to sunset back to a much lower amount in 2026. For 2023, you can give each person $17,000 (or $34,000 if you are married) without paying gift tax or filing a gift tax return.

5) What is gain and loss harvesting?

Depending on your personal tax situation, harvesting capital gains or losses may be a good idea. Under current tax law, you can deduct $3,000 of capital losses against ordinary income, so selling stocks with unrealized losses can help lower your taxable income. With the recent rebound in the stock market, you may be able to harvest capital gains. If you are in a low-income year, you may be able to realize long-term capital gains at a 0% federal tax rate, or it may make sense to realize capital gains at the 15% tax rate if you expect your income to be higher in future years. Whatever your situation, any gain- or loss-harvesting strategy should be implemented in accordance with your overall asset allocation and risk tolerance in mind. This is a tricky strategy, so be sure to know how your gains will be taxed considering your situation, and how gains can affect other components of your financial landscape (tax on Social Security benefits and Medicare premiums are some that come to mind). (Note: For those whose children have investment accounts, some gains can likely be harvested at 0% in each of their accounts while avoiding the Kiddie Tax. Discuss this with your CPA/advisor.)

6) What tax planning strategies should I consider for my business?

For business owners, there are several strategies you may consider for additional tax deductions this year. One of the biggest is bonus depreciation where companies can deduct 80% of the cost of new and qualifying business assets. This deduction drops by 20% each year, until it phases out completely after 2026. Those who are self-employed or owners of pass-through entities may qualify for the 20% deduction for pass-through income. This deduction may be subject to limitations for married-filing-jointly taxpayers with income over $364,200 or single filers with income over $182,100.

7) How can open enrollment impact my taxes?

For many, open enrollment is happening now or will be soon. Make your elections for maximum tax benefit by considering retirement and HSA contributions. Your employer may offer flexible-spending accounts, deferred compensation, or other benefits for you to consider. Share your open enrollment information with your financial or tax advisor, as they may recognize more opportunities that work well for your financial plan.

No matter your situation, reviewing your tax-planning strategies with your advisors can help ensure a fit with your situation and overall financial plan. At Timberchase Financial, we provide thoughtful, comprehensive financial advice, including planning for taxes. If you would like to start a conversation about how our CERTIFIED FINANCIAL PLANNER™ professionals may be able to help you with your financial plan, please contact us.