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Insights from The Mind Money Spectrum Podcast Episode #48

As the year draws to a close, many high-performance professionals like you find themselves reviewing their financial situation with a keen eye toward optimizing outcomes. One key area that often gets overlooked until it is too late is end-of-year tax planning. This period, typically from mid-November until December 31st, represents a critical window for actionable steps that can have a meaningful impact on your tax bill—and ultimately help protect and grow your wealth.

In this post, I’m sharing practical, fee-only fiduciary advice for investment-related tax planning strategies that you can still implement before the clock runs out on this calendar year. These insights derive from detailed conversations I’ve had on my podcast and with clients, focusing exclusively on stocks, bonds, and traditional investments—not alternative investments, which tend to complicate tax management without clear benefits for many professionals.

Why Tax Planning at Year-End Matters

You already know most of your income and investment activity for the year. With this near-complete picture, the last few weeks offer a valuable opportunity to make calculated moves that can reduce your tax liability, improve your portfolio alignment, and set you up for better financial security down the road.

It’s important to understand that end-of-year tax planning isn’t always about minimizing your current taxable income. Sometimes you want to strategically increase income to take advantage of lower tax brackets or execute Roth conversions that reduce your lifetime tax burden. Other times, it’s about harvesting losses that offset gains or making smart distributions to manage your future tax exposure.

Actionable Year-End Tax Planning Strategies

1. Tax-Loss Harvesting: Turn Investment Losses into Tax Savings

If you hold investments that have declined in value—say a stock down 20% since purchase—selling those positions can realize a capital loss that offsets gains elsewhere in your portfolio or reduces your taxable ordinary income by up to $3,000 per year. This strategy, known as tax-loss harvesting, has a few critical rules to follow:

• Losses offset gains first: Capital losses directly offset capital gains realized during the year, reducing your net taxable gains.
• Then offset ordinary income: Up to $3,000 of net capital losses can reduce your ordinary income annually, which is taxed at a higher rate.
• Carry forward unused losses: If your losses exceed gains plus $3,000, you can carry the remainder forward indefinitely to future tax years.

One smart way to harvest losses without losing market exposure is to sell the losing investment and immediately buy a similar but not identical asset. For example, selling an S&P 500 ETF and replacing it with a Russell 1000 ETF preserves your large-cap U.S. equity exposure but avoids the wash sale rule, which disallows recognizing a loss if you repurchase the same or substantially identical security within 30 days.

2. Rebalancing Wisely to Control Risk and Taxes

Over the year, your portfolio allocation drifts as certain asset classes outperform others. This drift can expose you to unintended risk or missed opportunities. Regular rebalancing back to your target allocation is crucial, and year-end is an ideal time to reassess.

However, selling appreciated assets to rebalance generates capital gains, increasing your tax liability. Consider these approaches to minimize tax costs:

• Coordinate rebalancing with tax-loss harvesting: Offset gains by realizing losses elsewhere in the portfolio.
• Utilize different account types: In taxable accounts, you may want to sell investments with losses or low gains, while using tax-deferred accounts (IRAs, 401(k)s) for selling appreciated securities to avoid triggering immediate taxes.
• Deploy new contributions: Add fresh capital to underweighted asset classes to rebalance without triggering taxable sales.

3. Managing Required Minimum Distributions (RMDs) and Retirement Accounts

For those over 72, RMDs require you to withdraw a minimum sum from traditional IRAs or 401(k)s annually. Although recent legislation like the CARES Act has temporarily suspended some RMDs, it is vital to plan for these taxable events.

You can mitigate the tax impact of RMDs by planning which assets to sell inside your retirement accounts and coordinating distributions with your portfolio rebalancing. In some cases, careful planning allows you to reduce future RMDs through Roth conversions, thereby shrinking the tax bite in retirement.

4. Roth IRA Conversions: Pay Taxes Now to Save Later

Roth conversions enable you to move money from traditional tax-deferred retirement accounts into Roth accounts where future growth and withdrawals are tax-free. Executing these conversions during a low-income year maximizes their benefits.

For example, if you took a sabbatical, lost a job, or had deductible losses that lowered your taxable income, it may make sense to convert an amount up to the top of your current tax bracket without pushing you into a higher one, locking in a lower tax rate.

This strategy involves targeting your tax bracket rather than simply minimizing current income—sometimes paying tax now at a low rate may save you significantly more in taxes over your lifetime.

5. Exercise Incentive Stock Options (ISOs) Carefully to Manage Alternative Minimum Tax (AMT)

If you hold ISOs from your employer, exercising them before the year-end can be a powerful tax strategy when planned properly. The key challenge is avoiding triggering the AMT, a parallel tax calculation that can increase your tax liability.

With the Tax Cuts and Jobs Act, AMT thresholds were raised, creating more room to exercise ISOs without AMT implications for some income ranges. Coordinating with your accountant to estimate your income through the year and timing your ISO exercises accordingly can unlock significant tax savings.

6. Monitor and Plan Around Mutual Fund Capital Gain Distributions

Mutual funds often distribute capital gains realized from selling securities inside the fund portfolio, and these distributions are taxable to shareholders.

Funds notify shareholders in advance about anticipated capital gain distributions, offering you a chance to sell the fund ahead of distribution and avoid that tax hit if your personal total gain is less than the distribution.

While this won’t be a year-end priority for every investor, being aware of these dates and considering whether to rebalance or exit a fund before distributions can improve your tax efficiency.

7. Keep an Eye on Health Insurance Subsidies and Income Thresholds

If you are under 65 and purchasing health insurance through the Affordable Care Act marketplace, your taxable income affects your premium subsidies dramatically.

Subsidies phase out sharply near certain income thresholds. Effective tax planning can help you stay within these brackets, ensuring you receive maximum subsidy benefits in addition to controlling your tax bill.

Putting It All Together: A Holistic Approach to Year-End Tax Planning

Tax planning is not just about isolated actions but about seeing the full picture. Here are some tips to guide you:

• Review your overall income and tax bracket early: Assess your income through November and project December to understand your tax position.
• Coordinate investment, tax, and cash flow planning: Consider your expected bonuses, expenses, and upcoming income changes.
• Use account-specific strategies: Take advantage of asset location—placing tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts.
• Don’t let the year-end rush push you into hasty decisions: Some tax moves carry complex consequences; engage your financial advisor and CPA for coordinated planning.

Final Thoughts for High-Performance Professionals Seeking Financial Freedom

End-of-year tax planning is a powerful lever for improving your long-term financial security and freedom. You don’t need to predict stock market moves or time interest rates—these strategies operate in your control with opportunities to reduce taxes on gains, maximize deductions from losses, and optimize your retirement savings structure.

Because taxes can erode significant portions of your investment returns over time, managing your tax liabilities prudently is as important as selecting the right investments. By adopting a proactive approach every November and December, you can ‘use it or lose it’—making the most of available tax strategies before the calendar resets.

As a fee-only fiduciary advisor, my focus is always on what’s best for you, not on selling products or chasing complicated alternative investments with uncertain tax consequences. Keeping it straightforward with stocks, bonds, and time-tested tax-aware moves positions you to keep more of what you earn and stay on the path toward financial freedom.

If you haven’t already, take stock of your situation today. Schedule a tax planning checkpoint to discuss these strategies and ensure you don’t miss this year’s window. Your future self will thank you.

Published originally on Tue, 10 Nov 2020 06:00:00 -0500

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If you’re ever in need of guidance, these blog posts may be of help. But be sure to contact a financial, tax, or legal professional for guidance and information specific to your individual situation. And as always you can reach out to me directly here with questions or concerns about your personal situation.

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