Year-end tax planning is an essential component of comprehensive financial management. While many tend to put off this process until December, proactively considering strategies to maximize tax benefits throughout the year can provide significant advantages—and acting sooner rather than later can be especially beneficial. Here are a few ideas to get your own wheels turning, as well as some insights and approaches we employ year-round to help protect your assets by minimizing your tax liability.
Charitable Giving
If you haven’t yet explored Gideon’s book Giving: A Handbook to Happiness for the Modern Philanthropist, it offers thoughtful strategies, many of which are especially beneficial for high-income earners. This can be a great opportunity to align your financial strategy with your values while gaining some valuable tax benefits in the process.
One of the most effective tax tools Gideon discusses in the book is a donor-advised fund, or DAF. Managed by a third-party sponsor (a nonprofit organization, for-profit financial firm, or community foundation), this type of fund offers meaningful tax benefits, a high level of flexibility, and low costs. Contributions to a DAF are tax deductible in the year they are made, and the limit is huge. You can donate up to 60% of your adjusted gross income (AGI) every year. This makes it especially useful if you’ve experienced a financial windfall, such as a large inheritance or appreciated stock, that could result in a substantial tax burden. Also, there is no annual payout requirement from the IRS, giving you complete freedom to decide when you want to give. If you have a high tax burden and are interested in philanthropy and charitable giving, this strategy can be a game-changer.
SALT Deduction Strategies
While the 2017 Tax Cuts and Jobs Act placed a $10,000 cap on the SALT deduction, there are still ways to maximize its impact, particularly for high-net-worth individuals. One strategy is ‘bunching’ deductions. This technique allows taxpayers to accelerate or defer income, enabling them to itemize deductions in high-expense years and take the standard deduction when expenses are lower. For savvy taxpayers on the cusp of benefiting from an itemized return, bundling deductions into a single tax year can pay off. A tax professional can help identify and claim deductions year over year to create a long-term strategy that works for you.
Additionally, some states now have SALT cap workaround programs that allow pass-through entities (PTE) to pay state taxes at the entity level, creating a potential tax benefit. Here in California, a law called the AB 150 gives many LLCs, S-Corps, or partnerships the option to pay an elective tax in the amount of 9.3% of the pro rata share or distributive share of the entity’s partners, shareholders, or members each year. If you own a business that qualifies, this is worth discussing with your tax advisor.
Tax Strategies Within Your Portfolio
As your trusted advisors, we are committed to enhancing your financial outcomes. From a tax-liability perspective, one of the most effective techniques we use is tax-loss harvesting, which involves selling specific securities at a loss to reduce the tax burden on gains realized from other investments. When appropriate, we often apply a combination of the following tax-loss harvesting tactics to help optimize your investment portfolio while reducing your total tax burden:
Offsetting Gains: To offset the tax implications of capital gains, underperforming investments are sold at a loss.
Deducting Against Income: If capital losses exceed capital gains, these can be deducted from ordinary income, up to $3,000 per tax year.
Carrying Forward Losses: If net capital losses exceed $3,000 and there are not enough capital gains to offset the losses in the year they are ‘harvested’, the losses can be carried over indefinitely to offset future gains or income.
Asset allocation also plays a critical role in managing tax efficiency in your portfolio. By allocating more investments that are tax-inefficient (such as those that generate high levels of taxable income or short-term capital gains) into your tax-advantaged accounts (like IRAs or 401ks), and placing tax-efficient investments in taxable accounts, we can further manage your tax liability.
To learn more about these strategies and how we use them to help grow and protect your assets by limiting the impact of taxes, see Avery’s blog post Tax-wise investing.
Tax Planning In Action
Year-end tax planning doesn’t have to be daunting, but it does require a proactive approach. The good news: at LCM we are always working to help grow and protect your assets—including applying these strategies to maximize your after-tax wealth when we can. If you are interested in taking advantage of any of the strategies above or learning more about our tax management process, please reach out. We are always here to help!
