Advisors, tax pros weigh in on best year-end tax planning tips

Advisor, tax pros weigh in on tax preparation measures.

By Doug Bailey

The air is getting cooler, the days are getting shorter, and Uncle Sam is charging his calculator in preparation for tax season. Like the October Fall Classic, this time of year also ushers in the season of “What can I do now to lower my tax liability?” or, “Is it too late to make changes to my tax situation?”

We canvassed financial advisors and tax specialists to get their tips on readying for tax season. They were quick with answers and suggestions and with some exceptions generally focused on strategies involving capital gains, investment losses, charitable contributions and IRA conversions. The overwhelming and near unanimous message, though, was don’t procrastinate.

“Do not wait until year’s end,” said Scott Curley, CEO and co-founder of FinishLine Tax Solutions in Houston. “Taxpayers need to stay ahead of the eight-ball and act now if they have any tax debt. The worst thing you can do is know that you owe money and don’t actively try to resolve it – this only maximizes your exposure and liability, which the IRS will notice, flag, and ultimately chase after.”

Tax loss harvesting

Several experts weighed in on “tax loss harvesting,” a strategy to replace devalued investments with something comparable that maintains overall portfolio investment design.

“In other words, sell Pepsi and buy Coke,” said Rob Burnette, CEO at Outlook Financial Center, in Troy, Ohio. “No change in portfolio value occurs, but you have a paper loss to offset any gains that will be reported. The only restriction is you cannot repurchase the stock you sold for 31 days to avoid ‘wash sale’ rules that would invalidate your loss deduction. This is the stock market equivalent of pruning a tree to make the tree stronger.”

There’s a silver lining in the current market environment in regard to loss harvesting, experts said.

“Just about every asset class is down for the year, so there are ample opportunities to capture these losses and they can be carried forward indefinitely,” said Glen Goland, senior wealth strategist and investment advisor at Arnerich Massena, in Portland, Oregon.

Charitable contributions rank high on list of tax season strategies.

“If you are required to take retirement age-based required minimum distributions (RMDs) from tax deferred retirement accounts, a portion or all of the RMD can be transferred directly to a qualifying 501(c)(3) charity and eliminate the income due to the taxpayer on the amount transferred,” said Outlook’s Burnette. “For taxpayers that are regular charitable givers, this provides a very tax-efficient and favorable way to support the institutions and causes you are passionate about.”

Bunch deductions

In order to itemize deductions, according to Sallie Mullins Thompson, principal and managing member at Sallie Mullins Thompson CPA, in Washington D.C., bunch 2-3 years’ worth of charitable deductions into 2022.

“Or donate to a donor-advised fund (DAF) which also works well when donating appreciated stock,” she said. “If you don't need your RMDs, have them distributed to a charity as a QCD – qualified charitable distribution. You won't get a tax deduction, but you will prevent the QCD dollar amount from being added to your income.”

Arnerich’s Goland agrees that bunching charitable gifts can maximize tax benefits.

“Most taxpayers get no deductions for their philanthropic gifts because most taxpayers are no longer itemizing deductions,” he said. “The standard deduction was doubled in 2017 and there is a cap on state taxes that can be itemized, making the standard deduction more attractive.”

However, Goland advised making one larger gift to a Donor Advised Fund this year and then covering future charitable commitments by transferring funds from the fund to charities of your choice.

“This 'bunching’ of charitable gifts is a common strategy to get taxpayers a valuable deduction in the year of the gift, where they itemize that large gift in year one and then take the standard deduction in subsequent years,” he said.

Evaluate estate tax liability

Evaluating estate tax liability should also be top of mind, tax experts said.

"This is the time of year when business owners and high-net-worth individuals should update their business valuations, so they can maximize their estate and gift tax strategy as a means to reduce their estate taxes," said Amy LaSala, director of valuations at Vision Point Capital, in Green Bay, Wisconsin. "Gifting is a great technique to transfer assets out of an estate if you are concerned it will be subject to estate taxes in the future, and a current valuation of your assets is the key to maximizing your contributions and reducing your tax liability."

Goland advises talking with tax attorneys or accountants about lifetime estate tax deductions.

“The current exemption is set to drop from over $11 million to around $5 million in 2025,” he said. “For families with large estates, it is important to talk this over with your financial and accounting teams.”

Roth IRA conversions to position retirement plans for tax-free withdrawals was also a common strategy mentioned. This strategy converts tax-deferred traditional IRAs into tax-free Roth IRAs to gain the future tax-free growth and tax-free distribution in retirement from the Roth IRA.

“Given the down market, the dollar amount in the account to convert will be less, so less taxes are due,” said Mullins Thompson. “Also, the lower tax rate environment due to the Tax Cuts and Job Act of 2017, allows one to pay less in taxes on the conversion. However, be aware of the dollar ranges of the tax bracket you are in so that the conversion does not move you to a higher bracket such as from the 24% one to the 32% one – a big jump.”

Converting the IRA make sense, said Outlook Financial’s Burnette, because tax rates are still near historical lows.

“Most experts agree that tax bills will be going up with the proposed changes to the tax code,” he said. “When the conversion is made, taxes are due on the total amount converted as ordinary income, since no tax has been previously paid on these funds. I recommend the taxes be paid from funds outside of the traditional IRA to minimize the tax bill and keep more funds for tax-free growth.”

A few other tips:

Business owners have an opportunity to further reduce their tax bill by purchasing equipment and taking the depreciation deduction to reduce a projected tax due. “As I tell my clients, it is better to write a big check to get a piece of equipment to improve your business and depreciate it for tax benefits than just write a large check to the IRS and not have the equipment,” said Burnette.
Investors should check their workplace retirement accounts to make sure they are on track to meet their annual savings goals and/or contribution limits. “There are still a few months’ worth of paychecks to make the necessary course corrections,” said Goland. “The more you can save in your retirement plan (up to the contribution limit), the more you are maximizing the tax advantages.”
Bunch medical procedures into one year “in order to get above the 'floor' for the medical deduction,” said Mullins Thompson.
If you own a business, set up an administrative home office so that you can take the full Home Office Deduction, she said, “and potentially deduct more for business travel as well.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].