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Year-End Tax Planning Strategies

Heading into the final weeks of 2021, many of us are focused on the holidays, but year-end is also an important time to consider tax planning strategies to implement before the closing of this tax year.  Here are several tax planning strategies to consider before the 2021 tax year is in the rear-view mirror.

  1. Tax Loss Harvesting – It goes against conventional investment wisdom to sell at a low, but when it comes to taxes, selling an investment that has an unrealized loss could help to either offset gains recognized earlier in the year or even help reduce your taxable income come April 15th

Investors who utilize tax-loss harvesting sell/realize an investment at a loss and use the sale proceeds to reinvest into similar securities keeping the overall exposure the same but allowing them to now accumulate that loss.

When utilizing this method, one should be careful of any ‘wash-sale’ rule violations.  These violations state that an investor cannot buy back into the security that they just sold within 30-days of the transaction; otherwise the loss that was realized would no longer be valid.After the 30-day window, you are able to repurchase that security.

If the net overall losses offset the net realized gains throughout the year, any remaining net losses carry over to your personal tax return up to $3,000 to help reduce your taxable income.  Any remaining net losses above $3,000 would continue to carry over to future tax years.

  1. Roth Conversions – Some individuals may be in a lower tax bracket this year due to several reasons such as: retirement, reduced wages, or higher expenses.  This can provide a great planning opportunity known as Roth Conversions.  Roth Conversions allow a person to pull funds directly from their pre-tax IRA/401k accounts and convert them into a Roth IRA/401k.  Any amount converted would be considered income for the current calendar year.  However, this allows you to transfer funds into a Roth account where those funds would grow tax-free and eventually be distributed tax-free.  If you plan to be in a lower tax bracket this year, then a Roth Conversion may make sense. 

  2. Philanthropy & Year-End Charitable Gifting – Charitable gifting is plentiful around the holidays.  Your investment portfolio may be one of your best tools to accomplish your gifting goals.  If you’re someone who either made charitable gifts in the past or if you’ve experienced a major transaction in 2021 where your income is higher than normal, below are a few strategies to consider:

a.   Qualified Charitable Gift from an IRA (QCD) – If you are currently taking required minimum distributions (RMDs) from an IRA and don’t necessarily need those funds to support your lifestyle, the Qualified Charitable Distribution (QCD) allows an individual who is age 70.5 or older to donate up to $100,000 of their IRA distributions from an individual retirement account directly to charity.  A QCD allows you to satisfy your annual minimum distribution (up to $100,000) which is excluded from your taxable income but also provides a direct cash benefit to charity, a win-win for both parties. 

b.   Gifting Appreciated Securities – For those who have a significant unrealized gain in a particular security, this can be an ideal opportunity to gift securities directly to a charity.  By gifting securities instead of cash directly to charity, the value of the donation is equal to the high/low fair market value on the date the gift was made  and allows you to diversify out of a concentrated position without recognizing the taxable gain while making a gift at the same time. 

Stock donations to a public charity are limited to 30% of Adjusted Gross Income (AGI) for securities held longer than one-year.Any amounts over the 30% limit will carry over to future tax years for up to five years.

c.   Donor Advised Funds (DAFs) – Individuals who experienced a unique income year either through a liquidity event or through unexpected high earnings may be concerned with the future tax liability.  A solution to help offset this unique tax year is using a Donor Advised Fund (DAF).  A DAF is a fund sponsored by a public charity that allows for an individual to make a larger sized cash/stock contribution and receive a current year tax deduction.  Unlike a gift of stock to a charity directly, making a gift to a DAF provides a current year tax deduction but gives the grantor (person making the gift) the flexibility to control when the funds ultimately go directly to charity.   Most DAFs allow the grantor to invest the funds in the DAF so this can be a great estate planning and family legacy tool.

  1. 529 Contributions – For those who are either parents or grandparents, saving for college can be a significant financial goal.  Most states offer a 529 College Savings plan where individuals/families can make contributions into those plans and receive an in-state tax deduction. 

  1. Health Savings Account (HSA) – If you have access to a high-deductible health insurance plan (HDHP), you may have access to a HSA which is an account meant for future medical expenses.  HSAs are funded with pre-tax funds and, when used to pay for qualified medical expenses, the funds come out tax free.  Some HSAs also allow individuals to invest their account balance above a certain dollar amount (ex. anything over $1,000) into the equity markets.  For those individuals who rarely have medical expenses, this is another great tool to help reduce your overall income and is the only account that allows for pre-tax contributions, tax-free growth and tax-free distributions if used for qualified expenses.

If you have any questions on the strategies that we have outlined or would like to know which one might help you please contact us.  The SRP WELLth team is happy to discuss the most suitable strategy for you and your situation.


About the Author:

Mario Echevarria, CFP®
Wealth Advisor















The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Wealth management (i.e. WELLth) services are provided separately from retirement plan consulting services you may receive from SRP as a result of participation in your employer's retirement plan. They may involve an advisory agreement and/or an additional fee.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.