5 Year-End Tax Planning Strategies Investors May Benefit From

  • Tax strategies
  • 12/6/2023
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Key insights

  • It's often advantageous to include tax planning with investment strategies, particularly at year-end when estimating tax projections.
  • Some strategies investors could consider include tax loss harvesting, asset location, and rebalancing.
  • Tax planning strategies can help investors take advantage of tax alpha — or improved portfolio performance.

Looking for tax strategies that could benefit your investments?

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Combining tax planning with investment strategies is often beneficial but can be especially so at year-end when calculating tax projections. Some strategies investors could consider include tax loss harvesting, asset location, and rebalancing. These strategies and others aim to help investors take advantage of tax alpha — or improved portfolio performance — by using available tax strategies.

Let’s explore five strategies that may help you maintain wealth while at the same time helping to be more tax efficient.

Tax loss harvesting

Tax loss harvesting is a strategy that allows you to use stock losses to offset stock gains in a way that can impact your tax liability. Tax loss harvesting can be used for general investments but not on any tax-deferred accounts, such as individual retirement accounts (IRAs) and 401(k)s. While tax loss harvesting might be top of mind during year-end, consider implementing this strategy throughout the year.

There are some rules involved with tax loss harvesting, including the wash sale rule, which disallows investors from triggering a loss and then buying the same security within 30 days.

Watch this example of how an investor could potentially save $400,000 in taxes on a $1 million gain using tax loss harvesting.

Asset location and rebalancing

Asset location is a strategy that takes advantage of the different tax rates of different investment types. Some of the differences include:

  • Interest income and short-term capital gains are taxed at ordinary income tax rates
  • Qualified dividends receive a lower or preferential tax rate
  • Non-qualified dividends — or ordinary dividends — are taxed at ordinary income tax rates
  • Long-term capital gains are also taxed at preferential rates for most taxpayers while those in the highest tax brackets pay 20%

Asset location strategy also considers taxable accounts (checking, savings, money market, and brokerage accounts) as well as tax-deferred accounts (traditional and Roth IRAs).

It can be especially beneficial to combine asset location and rebalancing strategies. Rebalancing involves selling and buying assets to maintain a target asset allocation. It typically involves selling well-performing assets and buying underperforming assets.

Watch this example of how an investor could earn an extra $250,000 over 20 years through asset location and rebalancing.

Qualified Opportunity Zones

Qualified Opportunity Zones (QOZ) are another tax-saving strategy and investment opportunity that, in some cases, allows investors to eliminate tax liability on capital gains. Here’s an example of how it can work:

  • You sell a position in your portfolio in 2023 resulting in a realized capital gain
  • You invest the gain in a QOZ and can defer the gain until December 31, 2026
  • As long as you stay invested in the QOZ for 10 years, you’re allowed to sell the investment without any additional tax liability

There are not too many opportunities in the tax code where you can have a capital gain and not pay tax. Though QOZs aren’t necessarily a good option for everyone as you must be able to invest the money for 10 years to get the full benefit.

Required minimum distributions

Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year starting at age 73 (new age in 2023). These withdrawals are taxable, but if you’re charitably inclined, there’s a strategy you can use to avoid paying taxes on the distributions.

The qualified charitable distribution strategy allows individuals aged 70 1/2 or older to donate up to $100,000 per year directly from a taxable IRA to charities, thus excluding RMD income from taxation. By excluding RMD income from taxation, you may reduce your adjusted gross income, potentially favorably impacting Medicare premiums and reducing overall tax liabilities.

Watch this example of how you could use the QCD strategy to reduce taxes.

Charitable accounts

Another tax strategy for those who are charitably inclined is the use of donor advised funds. These accounts are established at public charities and allow donors to make charitable contributions and receive an immediate tax deduction. Donors can recommend grants from these funds over time, providing them with flexibility in giving to support organizations of their choice.

You can also donate appreciated securities which eliminates any capital gains taxes that would otherwise be due. A charitable deduction of up to 30% of adjusted gross income is allowed for donations of securities if you itemize your deductions. This strategy also can be used in rebalancing, further enhancing that benefit.

How we can help

These five tax planning strategies may help reduce your taxes, but each has pros and cons so it’s recommended to work with a private client services team that knows your individual financial situation and goals. CLA’s team regularly helps clients use these and other strategies to meet short- and long-term financial goals. Contact us to learn more.

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