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Before the Ball Drops: Year-End Tax Strategies to Maximize Savings

Written by Dennis Coon | Oct 30, 2024 10:00:00 AM

As the year draws to a close, it’s essential to evaluate your financial situation and take advantage of tax-saving opportunities. Year-end tax planning involves taking a proactive approach to managing income, deductions, and investments in a tax-efficient manner. Here are a few strategies that could help you save on taxes and set you up for a more secure financial future.

Roth Conversions: Take Advantage of Lower Income Years

A Roth IRA conversion involves transferring funds from a traditional IRA or 401(k) into a Roth IRA. Unlike traditional IRAs, Roth IRAs grow tax-free, and qualified withdrawals are also tax-free. If you anticipate being in a lower tax bracket this year or have experienced a drop in income, converting some or all of your traditional IRA assets into a Roth IRA could make sense. 

The key is to carefully plan the amount you convert, so you don’t push yourself into a higher tax bracket. While the converted amount is taxable in the year of conversion, this strategy can lock in future tax-free growth, which could be especially valuable if you expect tax rates to rise over time.

Tax-Loss Harvesting: Offset Gains and Lower Your Tax Bill

Tax-loss harvesting is a technique used to offset capital gains by selling investments that have lost value. If you have positions in your portfolio that are currently underwater, selling them can generate a tax loss that can be used to offset capital gains from other investments. For those without realized gains, up to $3,000 of excess losses can be used to offset ordinary income, with any remaining losses carried forward to future years.

However, beware of the wash-sale rule, which prohibits you from repurchasing the same security within 30 days before or after the sale. By navigating this rule effectively, you can minimize your tax liability while maintaining your portfolio's risk exposure.

Gain Harvesting: Strategically Realize Gains

On the flip side of tax-loss harvesting is gain harvesting. This involves intentionally selling appreciated assets to "harvest" gains while in a lower tax bracket. For example, if your taxable income is below the threshold where long-term capital gains are taxed at 0%, you might consider realizing some gains to take advantage of this favorable rate. 

Even if your income is not low enough for a 0% tax rate, it could still be advantageous to realize some gains to reset your cost basis or avoid higher capital gains taxes in the future.

Charitable Giving: Maximize Deductions Through Donor-Advised Funds

If you are charitably inclined, consider contributing to a donor-advised fund (DAF). This allows you to make a tax-deductible contribution and decide later on which charities will receive the money. By "bunching" several years of charitable contributions into one year, you may be able to exceed the standard deduction threshold and itemize deductions, leading to additional tax savings.

Review Retirement Plan Contributions

Contributing to tax-advantaged retirement accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs) can reduce taxable income while helping you build your nest egg. The end of the year is a great time to ensure that you’re maximizing contributions or even making catch-up contributions if you’re 50 or older.

Proactive year-end tax planning can help you maximize your tax savings while staying on course to achieve your financial goals. Strategies like Roth conversions, tax-loss harvesting, gain harvesting, and charitable giving through donor-advised funds can make a meaningful difference in your financial picture. As always, it’s essential to consult with a financial advisor or tax professional to tailor these strategies to your unique circumstances. Don’t let the year slip away without taking steps to optimize your financial plan.