Personal finance

These year-end tax moves may help you save, regardless of what happens in Congress

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Many popular tax-planning strategies are on the chopping block as Democrats debate how to pay for their $3.5 trillion spending package. However, now is the time to consider year-end moves to lower next year’s tax bill, regardless of what happens in Congress.

“Year-end tax planning should be done every year — not just when there are impending legislation changes,” said Marianela Collado, a certified financial planner and CPA at Tobias Financial Advisors in Plantation, Florida.

While it’s difficult to predict how tax law changes will shake out in Congress, here are some strategies to consider as the year winds down.

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Offset investment gains with losses

Filers may consider tax-loss harvesting, which allows them to offset capital gains with losses. Investors with more losing assets than winners may even deduct up to $3,000 against their regular income.  

“If you are facing an unusually high-income year or had tremendous losses, this might be a good strategy,” said Ashton Lawrence, a CFP with Goldfinch Wealth Management in Greenville, South Carolina.

If you are facing an unusually high-income year or had tremendous losses, this might be a good strategy.
Ashton Lawrence
Financial advisor at Goldfinch Wealth Management

However, those hoping to offload and repurchase the same assets need to be aware of the so-called wash-sale rules, which prevent someone from deducting a loss if they repurchase “substantially identical” investments within 30 days.

Currently, wash-sale rules don’t apply to cryptocurrency. But House Democrats want to close that loophole, effective Dec. 31. 

Roth conversions

Another year of unsteady income has prompted tax advisors to discuss so-called Roth conversions with clients.

This tactic allows someone to convert funds in pre-tax individual retirement account or 401(k) to an after-tax Roth IRA. Investors owe levies on the converted money, but the Roth IRA provides tax-free future growth.  

“If you had a particularly lousy 2021, you might be better off eating some taxes now,” said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.

If you had a particularly lousy 2021, you might be better off eating some taxes now.
Adam Markowitz
Vice president at Howard L Markowitz PA, CPA

The move may be attractive as House Democrats float repealing Roth conversions for those making more than $400,000 per year ($450,000 for married couples filing jointly). 

Charitable giving

Philanthropic investors may also consider a year-end charitable gift.

With a $12,550 standard deduction for single filers ($25,100 for couples filing together) in 2021, it’s tougher to itemize and claim the write-off. But many combine multiple years of donations, known as “bunching,” to clear the standard deduction thresholds.

Retirees age 70½ and older may consider a so-called qualified charitable distribution, a direct payment from pre-tax IRAs, which doesn’t count as taxable income.

Someone age 72 and older may use it to satisfy their annual required minimum distribution.  

“The qualified charitable distribution is a valuable gifting strategy if you want to give to charity in a tax-efficient manner,” Lawrence said.

Monitor legislation

While there are other tax moves to consider, many advisors are monitoring plans from Congress and waiting for the final legislation before pulling the trigger on year-end plans.

“The political winds are very difficult to read right now,” Markowitz said. 

Democrats are weighing higher income and capital gains taxes, a lower exemption for estate and gift taxes, among other proposals targeting the wealthy.   

“It just seems like everything we do for our high-net-worth clients is under fire,” Collado added.

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