We all know that life can get hectic as the year draws to a close and the holiday season approaches. In the past, we’ve shared a set of strategies for year-end financial planning. This year, we’re revisiting those tips to ensure they remain as relevant as ever to help you stay on track with your financial journey.
Six Strategies for Year-End Tax and Charitable Planning
- Harvest Losses in Taxable Investment Accounts
Think of loss harvesting as a silver lining for investors. If your investments have dropped in value, you can sell them at a loss to offset other gains (and potentially up to $3,000 of regular income). Any leftover losses can be carried forward to future years.
For example, Larry and Sandy have three mutual funds in a taxable account with $200,000 in unrealized losses. By selling these funds and investing in passive index funds, they realize a $200,000 loss that can offset their current or future gains, while still keeping their portfolio ready for a market rebound.
Just remember to avoid the “wash sale rule,” which says you can’t claim a loss if you buy a similar investment within 30 days before or after selling. 1
- Manage Your Tax Bracket
Take a look at your current tax situation and compare it to previous years. You might be able to save on taxes by adjusting when you take deductions or income.
In high-income years, it might be smart to accelerate deductions (like charitable contributions) and defer income (such as selling investments or exercising stock options). For those who like to give to charity, using a donor-advised fund can let you take a bigger deduction now and give to charities later.
On the flip side, in low-income years, you might want to push off deductions and speed up income. People approaching retirement with a lower income in the future might consider front-loading charitable donations to maximize their tax benefits now.
- Donate Appreciated Securities, Not Cash
Did you know that December donations account for up to a third of annual nonprofit revenue? 2
If you’re a holiday giver, instead of cash, consider donating appreciated securities from your taxable account. The charity gets the full value, and you avoid paying capital gains taxes on the appreciated amount.
This can also help you rebalance your portfolio without incurring capital gains taxes. Just keep in mind there are limits: you can donate up to 30% of your adjusted gross income to public charities and 20% to private foundations each year. Any excess can be carried forward for up to five years.
- Satisfy RMDs with a Qualified Charitable Distribution (QCD)
The SECURE Act 2.0 raised the age for required minimum distributions (RMDs) to 73, but you can still make charitable donations from your IRA starting at age 70½.3,4 You can donate up to $105,000 annually from your IRA to qualified charities without it counting as taxable income, though it will count towards your RMD. (Note: Prior to 2024, the QCD limit was $100,000.) 5
- Consider a Roth Conversion
If the market’s been down and your Traditional IRA assets have followed suit, this could be a good time to convert them to a Roth IRA at a lower tax rate. Future withdrawals from the Roth IRA will be tax-free, and it could also reduce the size of your estate.
This might be a good move if you expect your tax rate to go up or if you have a low-income year. High-net-worth individuals might even pair a Roth conversion with charitable giving to offset the tax costs.
Just remember that there are several factors to consider (time horizon, overall net worth, tax bracket, etc.) as you determine whether a Roth conversion is right for you.
- Analyze Mutual Fund Year-End Capital Gain Distributions
Mutual funds often distribute capital gains at the end of the year. If you’re holding a fund on the dividend record date, you’ll get hit with a capital gain distribution, whether you wanted it or not.
Check the estimates for these distributions and consider selling a mutual fund with unrealized gains or losses before the distribution date to potentially save on taxes. Also, be cautious about buying into actively managed funds right before these distributions, as it could lead to extra taxes.
Employing these strategies, together or separately, can help you make the most of year-end financial opportunities and potentially save on taxes while preparing for the new year. As always, our team is here to help with any questions you may have. To learn more, or to connect with a dedicated financial advisor, email us at info@veracitycapital.com, or schedule an introductory meeting here.
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1 Source: Investor.gov – “Wash Sales”
2 Source: 2023 M+R Benchmarks Report
3 Source: Fidelity – “SECURE Act 2.0: What the New Legislation Could Mean for You”
4 Source: Fidelity – “Qualified Charitable Distributions (QCDs): Planning Your IRA”
5 Source: Forbes – “IRS Announces Retirement Contribution Limits Will Increase In 2024” (November 2023)
Advisory services offered through Veracity Capital, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.