Practical End-of-Year Financial Planning

If you’ve been scrolling through social media, you’ve likely come across posts about ‘year-end tax planning’ or ‘financial to-dos before the year-end.’ But what are the genuinely crucial considerations most of us should focus on?

To start, you might want to contemplate realizing capital losses in the taxable portion of your investments. This can serve as a strategy to offset income and taxable distributions from mutual funds or bonds. Nearly every portfolio includes some losses, even in years when the markets are generally up. These underperforming positions can be sold now, and the resulting losses can be applied to offset up to $3,000 of ordinary income (including stock dividends and bond interest) and essentially any amount of capital gains from the sale of assets like a home or business.

The harvested losses can also be applied to offset the taxable income generated by a Roth conversion. In a Roth conversion, you move money from a traditional IRA to a Roth IRA, where you pay taxes on the transferred amount. This ensures that the funds you withdraw in retirement from the Roth will be tax-free. If there’s a substantial loss in your taxable portfolio, this may be an opportune time for a relatively tax-efficient Roth conversion.

For those with salaried employment, it’s essential to confirm that you are maximizing your 401(k) contributions for the year, with a maximum limit of $22,500 for 2022; or $66,000 for combined employee and employer contributions. Contributions to IRAs are less time-sensitive, as you have until April 15 to make your 2023 IRA contributions.

If you have a charitable inclination, consider making charitable donations before year-end to claim a tax deduction. However, your donation should ideally push your total tax benefit above the relatively high standard deduction threshold (currently $13,850 for single taxpayers; $27,700 for joint filers). This is why many advisors recommend ‘bunching’ multiple years of donations into one year and placing the funds into a donor-advised fund for future charitable contributions.

Conversely, to tax-loss harvesting, donating investment positions from taxable accounts that have significant gains above their purchase price can make sense. This approach eliminates the capital gains tax liability that selling these positions would trigger, as the tax deduction is based on the current value of the investment.

Lastly, if your advisor or accountant informs you that you’ve underpaid estimated taxes for the current year while you’re still taking distributions from your IRA, you can rectify this by having the underpaid estimated tax amount withheld from your last few distributions. Interestingly, even if the estimated payments are overdue, this action can satisfy the IRS’s requirements for timely payments.

While many of the financial tips circulated on social media should ideally be incorporated into your financial planning throughout the year, these are practical considerations with specific year-end deadlines.