Maximize Your Tax Savings: My Favorite Year-End Planning Strategies

Just like the aroma of pumpkin spice lattes filling the air and the excitement of choosing Halloween costumes, this time of year is ideal for diving into year-end tax planning.

These are my favorite year-end tax planning strategies for business owners to maximize your tax savings and improve your financial situation.

Maximizing tax-advantaged savings accounts

I always make it a point to thoroughly review the limits on tax-advantaged savings accounts and ensure that I am maximizing their potential.

Here are my top choices, listed in order of preference:

• Health Savings Accounts.  The deposits are tax-deductible, contributions grow tax-free, and distributions are tax free if used for healthcare.

• Roth 401k accounts. We like to maximize contributions to Roth accounts rather than accounts that are taxed in the future. Check your employer 401k to make sure contributions are going into the Roth. Roth 401k deposits grow tax free and can be distributed tax free in retirement.

• Roth IRA accounts.  Like Roth 401k, Roth IRA deposits grow tax free and can be distributed tax fee in retirement. There are income limits to contribute directly into a Roth account, so we utilize the backdoor Roth IRA contribution strategy in certain cases.

Contribution limits vary by account, and you should double check your numbers with our Important Numbers of 2023 table.

Converting IRA funds into Roth accounts

We expect tax rates will be higher in the long term and so we would rather pay taxes at today's historic low rates. Here are some common situations where converting makes the sense.:

• You are approaching retirement with a large IRA.

• You can afford to pay tax today with cash savings.   i.e., Roth conversions do increase your tax bill today.

• Your IRA investments have declined in value, and you anticipate them to recover in the future.

• You are young and are concerned about future taxes. Converting money to Roth provides a small amount of 'insurance' against tax rate increases in the future.

• You've realized you overpaid your tax liability for the year and don't want to wait for a refund.

Vanguard recently published an article showing how some clients and advisors underestimate the long-term value of a Roth conversion. Rather than look at only starting and ending tax rates, Vanguard suggests investors should factor in:

• Ability to pay conversion taxes from an outside taxable investment account.

• The tax basis of the IRA account. A market pullback is often the best time to make a conversion since reduced capital gains means a lighter tax bill.

• Potential future contributions to the IRA account, like backdoor Roth conversions.

• Client time horizon (a longer time horizon typically makes conversions even more attractive).

Vanguard's article emphasizes the importance of conducting a thorough analysis to determine whether a Roth conversion is a suitable strategy for your individual circumstances.

Consult a tax professional before making any transactions, as everyone's tax and investment situations are unique.

Optimizing Income and Expenses Across Your Business

Business owners possess a distinct advantage in shaping their income and expenses to align with their financial objectives.

A few prime examples of timing your income or expenses to reduce your tax bill:

• Retiring and selling a business in 2023 has major tax implications compared to waiting till January 1.

• Purchasing Equipment and using special depreciation rules to increase business expenses.

• Giving bonuses to staff this year versus next.

• Increasing your salary to a level where you can maximize your profit-sharing contributions as part of a 401k.

• Paying your state tax through a pass thru entity in order to exceed the SALT limitation on your personal tax return.

The current tax rates are set to expire at the end of 2025 so owners should begin the think ahead for potentially higher rates.

Tax Smart Investing

When the market experiences fluctuations, it presents an opportunity for you to employ tactics that can benefit your tax circumstances.

When markets are down implement 'tax loss harvesting':

• Sell the down investments and recognize a loss.  The loss can be used to offset gains or be carried to future years.

• After selling your down investment, reinvest the proceeds in a similar but different security to stay in the market. After the wash sale period expires, consider repurchasing the original investment.

When markets are up, implement 'tax gain harvesting' or donate appreciated securities:

• Are you in the zero percent capital gains bracket? If so, it could make sense to recognize a few gains at 0% tax.

• Consider donating appreciated securities to a charity to receive a tax deduction and avoid paying taxes on the gain.

In conclusion, there are a number of ways to maximize your tax savings as part of a financial and tax plan.

Here are a few other articles on year-end strategies:

Wall Street Journal - Sell Your Loser Stocks—and Other Year-End Tax Moves to Consider

JP Morgan - 5 tax planning actions to take before year-end

Disclosures:

The views, opinions, and content presented are for informational and educational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Nothing presented should be considered to be an offer to provide any product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. Before taking any action, you should first consult with a tax or legal professional. The information contained herein was obtained from sources believed to be accurate, and the Firm has made every attempt to ensure the accuracy and reliability of the information provided, but we cannot guarantee that it is accurate or complete. Hyperlinks to third-party websites contain information that may be of interest or use to you. Third-party websites, research, and tools are from sources deemed to be reliable. The Firm does not guarantee the accuracy or completeness of the information from third-party sources and makes no assurances with respect to results obtained from their use.