Year-End Tax Planning Tips

Before we know it, kids will all be back at school, the leaves will start changing, and then the holidays will be in full swing. In other words, the year-end is approaching quickly. Ahead of this, there are a few tax planning items to look at before 2024 closes out. Review this list for tips that may help you to lower your taxes, avoid penalties, create a more efficient investment portfolio, and help you accomplish your personal financial goals.

Max Out Your Retirement Contributions & Savings Goals

Tax-deferred investment vehicles provide tremendous long-term saving strategies that have the potential to reduce taxes now and/or later in life. Be sure to maximize your allowable contributions each year to leverage this opportunity, because once it’s gone, it’s gone; for most account types, we cannot go back and retroactively contribute for past years. These types of tax-advantaged strategies include: 529 plans, IRAs (Traditional and Roth), HSA plans, employer-sponsored retirement plans (401ks, 403bs, etc.), deferred compensation plans, and cash balance plans.

Spend Flexible Spending Account (FSA) Dollars

Flexible Spending Accounts (also known as Flexible Spending Arrangements) are for medical expenses (not including insurance premiums) and have a use-it or lose-it component. Money is contributed to the account (via the employer and/or employee) tax-free and can lower your current taxes. Although some plans offer a grace period and/or carryover of some funds to the following year, plan ahead and don’t leave any money on the table!

Complete Required Minimum Distributions (RMDs)

If you are over age 73 in 2024, you are required to withdraw a minimum amount from any tax-deferred retirement accounts you own. Accounts that fall into this bucket may be:

• Traditional or Rollover IRAs
• Inherited IRAs (Traditional & Roth)
• Employer-sponsored retirement plans (401k, 403b, 457b, SIMPLE IRA, SEP IRA, etc.)

There are formulas to solve for what the minimum distribution must be based on the account type and your age/life expectancy. Inherited IRAs in particular have specific rules to be cognizant of, some of which the IRS is still determining after the SECURE Act 2.0 in 2022. Work with your financial or tax advisor to determine your RMD(s) and what tax withholding should be elected on the distribution(s).

If you do not draw the Required Minimum Distribution by the calendar year-end (or, by April 1 of the next calendar year if you are age 73 in 2024 and taking your first RMD), there are steep tax penalties – 25% excise tax on every dollar not distributed.

Meet With Your CPA

Life can get complicated at times; we get that. The more complicated it gets, the more complicated your tax return might be. Most people want to avoid tax surprises, so looping in your CPA and financial advisor on your income and tax situation for the year can help avoid this.

If you own more than one home, own a business, have investments in a trust, or own a rental property, consider meeting with your CPA now before it gets too late in the year to see if they recommend any last-minute tax planning opportunities. As the year ends, and continuing into the first quarter of the year, accounting firms start ramping up and they may stop taking on new clients. Be sure you’re leveraging as many tax credits and opportunities as you have at your disposal. Some examples include: https://www.irs.gov/credits-and-deductions.

Tax-Efficient Gifting Opportunities

If you are charitably inclined, year-end is the perfect time to assess how to best give – whether to family or non-profits. Many custodians implement charitable deadlines early in December, so start planning early!

Charitable Giving

If you have a brokerage account with appreciated securities, consider gifting these shares to either a Donor Advised Fund or directly to the qualified charitable organization. This will allow you to give with more bang for your buck, as you won’t have to recognize the taxable gain on the shares you’ve donated. If you are in a high income or tax year or utilize itemized deductions on your tax return, you could also look at bundling charitable contributions for a few years to the Donor Advised Fund.

Additionally, if you are over 70 ½ and have tax-deferred assets (traditional IRAs, 401ks, etc.), you can send up to $105,000 a year to a qualified 501(c)(3) charity. This type of distribution – known as a “qualified charitable distribution” or “QCD” – would not flow through as taxable income on your return and can help lower future Required Minimum Distributions (RMDs).

See Coldstream’s article, “Charitable Gifting Options As We Close Out The Year,” for a full summary of giving options, including charitable trusts and foundations for those with even larger charitable goals.

Family Giving

An easy way to gift to family members ahead of year-end is by utilizing the annual gifting exclusion limit. The IRS allows for gifting (in cash or securities) up to these limits each year without dipping into your lifetime gift/estate exemption and with no need for filing of additional tax forms. In 2024, limits are:

• $18,000/person to any other individual or entity
• $36,000/married couple to any other individual or entity
• $72,000/married couple to any other married couple

There are tax considerations for giving securities to family members, such as the basis they will receive and tax impacts/rates for the beneficiary. College savings plans (529 accounts) also have some special rules where you can bulk-fund these plans in one tax year with five years’ worth of annual exclusion gifts.

Roth Conversions

If your income is lower in tax year 2024 (or you want to be opportunistic ahead of the potential for higher rates starting in 2026), completing a Roth conversion may be an ideal tactic for you. This strategy allows you to recognize taxable income now from a tax-deferred retirement account by converting funds/securities into a Roth IRA. Once in the Roth IRA, the funds will grow completely tax-free going forward and you will have ideally paid taxes at a lower rate. When markets are down, this strategy is especially compelling, as you can convert more securities to a Roth IRA for the same total target amount.

It is important to work closely with your CPA and financial advisor when determining how much in Roth conversions to complete, as all taxable income/deductions should be accounted for in the analysis and conversions cannot be “recharacterized” after 2017.

Review Your Portfolio

Nobody’s portfolio is perfect – make sure to review it for tax planning opportunities ahead of year-end as well.

Tax-Loss Harvesting

Do any of your investments have negative returns recently? Review your portfolio for tax-loss harvesting opportunities to increase your portfolio’s tax efficiency long-term and to save in taxes down the road.

This strategy allows you to book a tax loss by purposefully selling holdings at a capital loss. With the proceeds, you can purchase a similar fund instead to maintain the same exposure to the market, and then “unwind” from the trade in 30 days. It is important to:

• always stay invested so that you participate in any market rallies that may occur
• make sure that you are not accidentally creating a “wash sale” (or creating a “disallowed loss”) by:
  • swapping back into the old position too soon, or
  • by choosing a position to buy with the proceeds that is too “substantially identical” the original holding (per IRS)

Tax-loss harvesting trades should be carefully carried out, reviewed, and monitored to ensure they are implemented properly. If executed correctly, the tax losses can help offset capital gain realization going forward until used up. Note: the IRS limits -$3,000/year of capital losses that can offset ordinary income only, so not all tax losses can be used to lower taxable income in one tax year.

Avoid Capital Gain Realization Limits (Washington Residents)

If you are a Washington state resident, you may be aware of the capital gains tax that was implemented in 2022. For any capital gains in your portfolio that are over $262,000 (2023 limit), you will be subject to a 7% excise tax on top of the taxes owed to the IRS. Careful planning can typically help you avoid recognizing gains above this amount, unless substantial cash needs occur in a single year from your portfolio.

If you know you will need a large amount from your portfolio in future years (for example, if you anticipate a home purchase in 2025), it may make sense to look at recognizing some of those gains in 2024 instead. This way, you can smooth your tax burden by spreading the gain realization across multiple years and avoiding filing and paying an additional 7% tax.

When looking at how much in gain realization you have room for in a tax year, be careful to note that Washington does not allow for short-term and long-term losses to offset each other. This is different than the IRS’s treatment of capital gains, so separate accounting may be necessary.

Rebalancing Opportunities

Over time, as prices change on securities, any portfolio will get out of whack relative to your desired allocation targets. If you don’t have a financial/investment advisor keeping an eye on this, your portfolio risk levels could start to creep into a territory that may not be ideal for your goals or comfort level. If any positions have had a run-up, consider trimming from them and adding to areas of your portfolio that are down. This strategy allows you to buy low, sell high, and stay better diversified (but may incur capital gain taxes, unless trades are in a retirement account, or you have a capital loss carryforward).

Reduce Concentrated Stock Holdings

In the same vein, review any concentrated stock holdings that you may have. As a general rule of thumb, a “concentrated stock holding” is one that:

• makes up 10% or more of your liquid portfolio
• has high gain realization (bought or received at a very low purchase price)
• is tied to your income/current employer (such as ongoing stock awards as exposure)

These types of holdings come with much more inherent risk, as any individual stock could technically fail or not recover well. Reducing exposure into a more diversified approach will lower the risk in your portfolio, but also typically comes with higher tax burdens. There are a few tax planning strategies that can be utilized to unwind from these holdings over time, so consult your financial advisor to build a diversification plan that fits your goals.

Considerations for Business Owners

A lot goes into owning your own business. The IRS recognizes that certain expenses come with the territory (depending on your business type). As we near the end of the year, be sure to assess your business expenses and determine what you can deduct to lower your tax footprint. Or assess whether it makes sense to move forward with a business endeavor. Owning a business can also open doors of opportunity when it comes to saving. With a little extra expense and planning, company-sponsored retirement plans offer higher contribution maximums, tax deductions, and profit-sharing conveniences that aren’t available to non-business owners. With that being said, start looking into this early. Company-sponsored retirement plans are subject to strict DOL and ERISA laws and may take some time to set up before they go live. If you want to get your retirement plan established and running by January 1, have those conversations in October or earlier so you have plenty of time to review and select the bells and whistles of your plan.

Potential 2026 Tax Law Sunset – Tax Planning Opportunities

Currently, tax law is set to sunset back to pre-Tax Cuts and Jobs Act (TCJA) legislation starting January 1, 2026, unless Congress can approve and adjust the current tax code ahead of this deadline. Prior to the November 2024 election cycle, there are a lot of unknowns, and it would be wise to stay flexible until there is greater clarity on future tax planning opportunities.

This separate Coldstream article highlights our preliminary thoughts on how to best prepare for the potential sunset: https://www.coldstream.com/insights/navigating-the-impending-sunset-taxes/.

Summary

Since many of these strategies require thoughtful execution and planning, reach out to your Coldstream advisory or tax team to determine what year-end tax planning opportunities may be beneficial for your financial situation.