’Tis the season to make New Year’s tax resolutions, but as I have seen many times in my 25 years as a financial adviser, it’s those who plan ahead who tend to get ahead. We’re bumping up against the tail end of 2023, but there’s still time to make a few money moves to help get you prepped for a successful, upcoming tax season.
Here are a few options to consider and/or raise with your trusted tax professional alongside your financial adviser.
1. Max out (as much as you can) employer retirement plan contributions.
For many workers, access to a 401(k) or similar account is one of the easiest ways to save for the future, while also getting a break on current- or future-year taxes. Most plans allow for tax-deferred contributions, while some also allow for after-tax contributions through a Roth account. The earnings on the former accrue on a tax-deferred basis, while the latter compounds tax-free.
Of note, withdrawals from a Roth account are tax-free only if you’re over age 59½ and have held the account for at least five years. You’ll owe taxes on withdrawals from a tax-deferred account and a potential penalty if you are under age 59½.
Contribute at least enough to capture an employer’s match if one is offered. You don’t want to leave any free money on the table. Additionally, you can continue to contribute up to $22,500 for 2023, or up to $30,000 for those age 50 or older. Workers who haven’t hit that max limit — and who want to — may be able to boost contribution amounts in the last few weeks of the calendar year.
2. Consider tax-loss harvesting.
One advantage of a declining market is that it gives an investor the ability to sell a losing stock or bond and then use that capital loss to offset tax gains, either in the current or a future year. Tax losses can be carried forward indefinitely and can be used to offset gains on the sale of a stock or bond, a home, a business or a capital gain from a distribution from an actively managed pooled investment. Harvested tax losses can even be used to offset taxes on up to $3,000 of ordinary income.
There are rules around selling a losing investment and then buying a substantially similar security within 30 days, so it’s best practice to consult with a tax or financial adviser to make sure you don’t run afoul of IRS guidelines.
Additionally, tax-loss harvesting involves certain risks and tax implications, so it’s important to review all terms of consent in addition to tapping your tax adviser before taking action.
3. Plan for tax efficiency.
The purchase of low-cost, low-turnover mutual funds and exchange-traded funds (ETFs) is probably the most straightforward opportunity for tax-efficient investing, but there are many other strategies that can benefit an investor, depending on one’s particular needs and goals.
The tax advantages provided by municipal bonds in the current yield environment can be attractive for those even in mid-range tax brackets, as can the strategic placement of specific asset types into certain investment vehicles, to take advantage of the tax treatment of each. While income for municipal bonds is exempt from federal tax, you may owe taxes on capital gains if trading or redeeming shares. Furthermore, for some, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal alternative minimum tax.
Asset location decisions aren’t always straightforward, so consider consulting a financial adviser to help simplify the decision-making process.
4. Maximize charitable giving tax opportunities.
Many investors are honorably eager to support a favored organization, but not all consider the tax planning opportunities that charitable giving can present. Some of those opportunities include:
- A qualified charitable distribution (QCD), which can be made from certain IRA accounts to reduce a tax bill by reducing or eliminating a required minimum distribution (RMD) or reducing taxable income. The maximum annual QCD limit is $100,000, and the distribution cannot also be claimed as an itemized charitable deduction on a tax return.
- The donation of appreciated securities, which are not subject to a capital gains tax when received by a qualified charity.
- The establishment of a donor-advised fund, which can reduce an investor’s tax liability now, but also allow a donor to make donation decisions — where to donate and how much, for example — in a future year.
Some investors may be best served by combining several charitable giving strategies — by maximizing a deduction by donating the fully allowable 30% in appreciated stock and another 30% in cash, for example — or by stacking two years’ worth of contributions in one year, so they can take advantage of a fully allowable deduction on charitable giving. A tax or financial adviser can help parse through the details.
5. Make gifts to your family.
An individual can gift money to children, family or other loved ones up to $17,000 each per year ($18,000 for 2024), without incurring a gift tax. That amount doubles to $34,000 per year for married couples. I’ve seen this exclusion used to fund a child’s or grandchild’s 529 college savings plan, or to transfer wealth over time. Family gifting is a use-it-or-lose-it strategy; if the annual exclusion is not used in a particular year, it is reset for the next year.
Some of these strategies are straightforward and easy to institute, while others require more planning. Part of my job as a financial adviser is to help clients identify which tax planning opportunities, be they a sizable charitable donation, the sale of a business or an impending retirement, are present, and to help build a roadmap to create the most efficient tax strategy for each — both for the coming year and for the long term.
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice.
Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions, and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties regarding such information, or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.
Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.
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