Wealth Management Strategies: Year-End Tax Planning Checklist

In the rush of holiday shopping and family gatherings, you may overlook key year-end wealth management strategies. However, now is a great time to meet certain requirements and leverage year-end strategies to help mitigate taxes before the new year. In this checklist, we’ll explain essential wealth management strategies we help clients navigate that may also fit your financial situation and needs.

Tax-Loss Harvesting

Tax-loss harvesting can help reduce your taxable income by offsetting capital gains with capital losses. Here’s how it works and what to consider:

• Identify Losses: Do you have any investments in taxable accounts that have depreciated? When you sell these investments, you realize a “capital loss” required for this strategy.
• Offset Gains: Did you sell any investments at a profit this year? If so, you’ve realized a capital gain that could be subject to taxes. You can use your realized losses to offset your gains to reduce your tax liability.
• Reinvest: You can also reinvest your earnings from selling depreciated investments. However, the IRS does not permit buying a nearly identical share within 30 days before or after the sale, also known as the wash-sale rule.
• Carry Forward Excess Losses: If your losses exceed your gains, consult an advisor about strategically applying excess losses to reduce your taxable income this year and in future years. 

Avoid or Reduce Capital Gains Distributions

Certain funds may distribute capital gains to shareholders when they sell a share at a profit during the year. Shareholders are responsible for paying capital gains taxes on this distribution. You don’t have to sell the share to be subject to these taxes. Here’s how to reduce or avoid the distribution to manage your tax burden.

• Identify Upcoming Distributions and Dates: Consult with your custodian or advisor to determine which investments in your taxable accounts are affected and when the fund plans to pay the distribution, known as the “pay date.” Also, note the “record date,” which will finalize which shareholders will receive a distribution.
• Sell Shares Before the Record Date: You can consider selling out of the positions that may generate capital gains distributions before the record date. You can sell all affected investments to avoid a distribution entirely or sell a portion of your shares to reduce your distribution amount. You will still be required to pay taxes on any distribution you receive. 
• Reinvest: You may also reinvest earnings from the shares you sell but be sure to avoid the wash-sale rule.

Charitable Giving and Family Gifts

There are various gifting strategies to consider at year-end to help reduce your taxable income while fulfilling your charitable and wealth transfer goals. Here are some that may fit your needs:

• Make a Qualified Charitable Distribution: If you’re 70½ or older, you can transfer up to $100,000 from an IRA to a qualified charity. Donations will reduce your taxable income and be calculated toward your required minimum distribution (if you’re currently 73 or older).
• Coordinate Charitable Donations with Higher Income or Capital Gains Years: Charitable donations can provide valuable itemized deductions if you’ve realized significant capital gains or earned a higher income, which could push you into a higher tax bracket. You may also consider bunching donations or using a donor-advised fund, which allows you to give over time and offset your liability.
• Transfer Wealth to Reduce Your Taxable Estate: Maxing out the annual gift tax exclusion effectively reduces your estate’s value and taxes over time while supporting loved ones. The exclusion allows you to gift up to $18,000 or $36,000 for married couples (for 2024) to any number of people to transfer wealth away from your estate. Gifts are not limited to family and will not trigger gift taxes or the lifetime estate and gift tax exemption of $13.61 million (in 2024) if they are within the thresholds. You may also consult with your advisor about additional strategies to reduce your taxable estate, such as establishing trusts or making qualified education or medical payments for someone else.

Max Out Contributions to Tax-Advantaged Accounts

Maximizing annual contributions to tax-advantaged accounts can offer additional benefits. Consider these strategies if you have any of these accounts:

• Traditional 401(k) or IRA: Contributions to tax-deferred accounts can help reduce your taxable income and overall tax bill when made in the same year. Here are the annual contribution limits for 2024:
  • Traditional 401(k): $23,000 ($30,500 for those 50 or older)
  • Traditional IRA: $7,000 ($8,000 for those 50 or older)
    
• Health Savings Accounts (HSAs): Similarly, personal contributions to an HSA can help reduce your taxable income in the same year. Here are the annual contribution limits for 2024:
  • Individual Coverage: $4,150
  • Family Coverage: $8,300
  • 55 and Older: $1,000
• 529 College Savings Plan: If you contribute to a 529 plan, and your state offers a deduction or credit, consider maxing out your contributions to help reduce your state taxable income. Learn more about your state’s 529 plan laws. 

Defer Income and Capital Gains

If you anticipate being in a lower tax bracket next year, deferring your income and capital gains can help reduce your taxable income in the current year and push out your liability when your tax rate is lower. Here’s how you can achieve this:

• Time Your Income: If you can, delay receiving a portion of your year-end income so you can recognize it next year. For example, you could defer a bonus or delay sending invoices if you’re a business owner. 
• Delay the Sale of Appreciated Investments: If you have appreciated investments, consider holding off on selling them until next year. You can defer capital gains taxes to the following year and avoid paying them in the current year.

Satisfy Required Minimum Distributions

If you’re 73 or older, you must take an annual requirement minimum distribution (RMD), an obligatory withdrawal from tax-deferred retirement accounts like traditional 401(k)s and IRAs. Here’s what you should know about RMDs:

• Ordinary Income Taxation: RMDs are taxed as ordinary income. If substantial, it could push you into a higher tax bracket and result in a higher tax liability overall. Consider your RMD amount when tax planning to help reduce your taxable income where possible.
• Qualified Charitable Distribution: As we’ve explained, a QCD of up to $100,000 made directly from an IRA will count toward your annual RMD and be excluded from your taxable income.
• Roth Conversion: Since Roth IRAs are not subject to RMDs, you may consider converting some of your traditional IRA to a Roth to lower future RMD amounts and overall taxable income. Note that you will be taxed at the time of conversion. Consult with an advisor to discuss if the long-term benefits of converting outweigh a potentially higher tax bill.
• Taking More than What’s Required: You may consider taking more than required to reduce your future RMD amounts and tax liability. You may also use this strategy if you anticipate being in a higher tax bracket next year and want to pay taxes at a lower rate this year.
• Penalties: Failure to take an RMD by the Dec. 31 deadline will result in significant fines. You can take the RMD any time during the calendar year but be sure to plan ahead if you need to manage your tax liability or make adjustments to avoid potential tax implications.

Year-End Wealth Management Strategies with Monarch

As year-end approaches, consulting with professionals, such as a financial advisor, tax professional, and estate planning attorney, is critical to ensure you’re taking advantage of tax-saving opportunities, satisfying your obligations, and effectively navigating complexities. 

The Monarch team can help you explore various strategies to make more informed decisions based on your circumstances. Contact us to review your financial and tax plans and take year-end actions to keep your goals on track and position yourself for success in the new year.