Effective Tax Strategies To Consider Before Year-End

In this episode of the 'Retire Early Retire Now' podcast, host Hunter Kelly from Palm Valley Wealth Management discusses essential tax-saving strategies and deadlines to consider before the year ends. Topics covered include maximizing 401k and IRA contributions, Roth IRA conversions, required minimum distributions (RMDs), capital gains or losses harvesting, utilizing flexible spending accounts (FSA), and donor-advised funds for charitable giving. The host emphasizes the importance of preparing early to avoid last-minute issues and provides advice on rebalancing investments and managing tax withholdings. He also introduces tax-saving tools and services offered by Palm Valley Wealth Management.

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Transcript

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And welcome to the retire early retire now podcast. I'm your host hunter Kelly owner of Palm valley wealth management. And today we're going to talk about end of year tax savings strategies and how we can maximize those before the end of the year. And yes, it's only the first week of September, but we need to start thinking about these things. because December 31st comes up quickly. Next thing you know, we got holidays. Halloween Thanksgiving. Christmas Hanukkah, all, all qualities coming in. So you going to be seeing family. The last thing you're going to want to do is, review your 401k and make sure you contribute it to the proper amount. Ah, look at tax deductions, things of that nature, all these things that we're going to talk about here, very shortly. But if you like this podcast, go ahead and share it with a friend who doesn't like saving on taxes. As I said last week, taxes will probably most definitely be. The biggest expense that you will have over your lifetime and each year. So why not try to avoid as much of that expense as possible within the code, the IRS code. go ahead and share that with a friend so that they can do the same thing and leave a five-star review on your favorite podcasting app. But without further ado, let's hop into it. So why is end of year tax planning so important? Well, like I just said, we want to avoid as many taxes as possible because this is going to be a very large expense over our lifetime. Probably the largest. And so we want to make sure that we can keep that money in our pocket so that we can reach our financial goals quicker, and have that extra money to do the things that we want to do have that flexibility. What are some, let's just start off with some key deadlines. So what are some, December 31st deadlines that you need to think about? when you're thinking about some tax savings strategies. if you're charitably inclined, so you need to make that charitable contribution before December 31st, a 401k contributions to be made before December 31st Roth IRA conversions. searcher or traditional to Roth IRA conversions need to be made before December 31st RMD. So if you're in that window of taking your required minimum distributions from your. pretax retirement accounts. You need to have that done by December 31st. harvesting your capital gains or losses. So if you have any investments that, oh boy, they did really well this year, I needed to take some of those gains so I can maybe potentially pay a lower tax rate today than I would next year. or vice versa. I have some. Bad losers that I want to take advantage of. Go ahead and sell those and buy a different stock. or mutual fund, whatever it may be for you, then go ahead and do that before December 31st, make sure you use the money in your FSA, your flexible spending accounts. So unlike a health savings account. you cannot roll over. Most or any money from your FSA is to make sure that you spend that money. business expenses and deductions as well. So if you own a business and then gifting to individuals, so if you're a, for whatever reason, gifting money, two friends, families, things of that nature. for whatever your situation calls for, we're making sure that that is done as well on December 31st. So we'll get into some of these in a little bit more detail, but just make sure. that you're doing this. And I, as a firm, as Palm valley wealth management, start to do a lot of these, tax planning techniques, like Roth conversions. Taxol servicing and things of that nature. around November and try to get that done before December 15, just in case there's any hiccups. I especially on this Roth conversion, if you're waiting until last minute, maybe your custodian doesn't have no time to actually. get the paperwork. and do that service request for you. So make sure that you're doing this. well then, with a few weeks to. With a few. With a few weeks left in the year so that you're not caught doing it on December 31st and expecting them to get it done. luckily some of that stuff has become a little bit more automated, but still you don't want to take that chance. so the first thing we want to talk about here on a specific strategy, our 401k contribution. So again, it is the first week of September. So let's say maybe you weren't necessarily planning on maxing out your 401k, but you received a larger raise. Or maybe your spouse had some significant, income that they weren't planning on. Or you just miscalculated a little bit. On your contributions earlier in the year, and you want to max them out, go ahead and make those changes on your dashboard. whether it be fidelity and power. Vanguard, whatever that may be. and go ahead and change your contribution rate to make sure that you can max that out. By the end of the year. The next thing I want to talk about our IRA contributions. this one I didn't mention at first, because there is not a December 31st deadline. it is due by the tax filing date. in April. So it's usually the second week in April. depending on when that Tuesday falls or that money falls around April 15th. And so we want to make sure that if you plan on contributing to your Roth IRA, Or a traditional IRA. We want to do that before that time. But again, always good to start planning if you haven't saved for that amount, if you're wanting to max it out, whatever that may be. We do have that time until April 15th to contribute to those accounts. And then for my listeners that are over the age of 50, you have some catch-up contributions you're allowed to do so for IRAs. You'll hear allowed an extra thousand dollars. torture your IRAs, whether it be a Roth or traditional. And then for your 4 0 1 plans for most 401k plans, you'll have an extra$6,000 a year. that you can put toward that. especially the 401k that allows you to catch up. quite a substantial amount of money and get that tax deduction. If you're doing that pre-tax money. So take advantage of those. If your, your situation calls for. And again, adjust your contribution rate if necessary, because that does have, the December 31st deadline. Now let's get into some investment talk. so toward the end of the year, we want to assess our, our investments and see how are they doing? Which ones are the winners? Which ones are the losers? Do I need your. Rebalance my portfolio because instead of a 60, 40, now it's a 70, 30. and it's outside of the limits of what my risk tolerance wants to be. Or maybe it's the opposite way your equities didn't perform how you expected. And your fixed income outperformed. Maybe you were 50 50 now. Whatever that case is. We want to reassess that. Say, do I need to rebalance? Are there some significant losers that I want to capture some losses on paper, which we'll talk about here in just a second. Or are there some significant winners that maybe they're over bought? We feel that people are going to start taking their profits. so let's just Reeb balance back to our original allocation so that we can capture some of those gains. And so the first thing I want to talk about is tax all-star Racine. So what is tax loss? Harvesting tax loss harvesting is saying you're buying a security, like an ETF. Or a stock. and that security is at a loss. So let's say we buy XYZ stock for a hundred dollars a share. Over, a certain amount of time. It goes down to$80 a share. Well, we sell that on paper. We're going to have a$20 loss. Now we can go back and we can buy that stock, but we have to wait a specific amount of time. Generally another 30 days. before we can go by that. stock again because of what's called the wash Sell rule. So generally what will happen, especially with these larger institutions, they will sell that particular XYZ stock for a loss of$20. They'll have some sort of similar acting stock, but not, substantially similar. And they will buy, let's say stock, ABC. So that they can keep that money invested. and then as, they either get passed that wash shell rule, Time period, or maybe they just like ABC stock more. they will, that stock will either recover or the new, the stock they rebought will recover. And now we have a$20 loss that we can offset for a capital gains later on down the road. I use a custodian sci. that this is kind of their bread and butter. They're always looking for these opportunities and brokerage accounts, obviously where the retirement accounts does not matter generally. you can buy and sell as much as one and, you have defer growth. So the taxes would only be paid. either potentially. as you take that out or if you've already paid as a Roth IRA, you don't have to worry about taxes ever again. So SEI. is looking for these potential opportunities and they are checking those daily. So when there is a lot of volatility in the market, a lot of ups and downs, we have a 2% up day, a 4% nowaday, 6% update, 10% down day. A lot of volatility. Then they will look for those opportunities to go ahead and sell any specific, position to capture those losses and they'll have their backup. holdings so that they can hold that. particular holding for the specific amount of time that they need to, to avoid the wash sale rule. And they'll get back into that original investment. If it still fits the portfolio and what their research says. and so they do a really good job of that. And the biggest thing for my clients is that at the end of the year, I can. I run a report and I can show, okay, this is how much we have saved. in taxes via, the, the losses that we've captured on paper. Versus, what. Versus, what the account actually did. in some instances, your, Your account balance may be up, but you had a couple of losers and you're in your portfolio. They were able to capture some losses. And now you, your account balance is up, but you still have the ability to sell and then offset those losses or offset those gains. With those losses that you've captured. Over time. Back to, the original, what is Taxol service. And we want to make sure that we're looking for these opportunities at the end of the year. And throughout the year, but at the end of the year, as, as this. The topic of the podcast is, we want to make sure that they're, we're looking for those opportunities. so that, we can take advantage of any taxes that we can avoid because we can just take advantage of some losses and our investments. And then if you think about a portfolio rebalancing, we want to rebalance our portfolio one to stay within our risk tolerance. We have. Generally, we have an allocation that we want to stick with, to get their desired outcome or desired return. And so if we get too far astray from that specific allegation, we want to, rebalance. And so sometimes that's a good thing because maybe the equity portion of your portfolio has ran up because the market has been doing well. And we want to capture those gains. So we rebalance or selling, the big winners. to buy some of the more valued or undervalued. holdings in that particular portfolio. Or just reallocate it to something that's a little bit more stable, like fixed 10 gum. it's the opposite. We want to capture those losses. at least for the short term, so that we can use those to also gains. in the longterm. again, if you work with Palm valley wealth management and you have a brokerage account. we can generate what's called a tax saved. Report where we can look at. Okay. How much exactly did we capture and losses and what does that equate to? Based off your situation, how much we actually saved you in dollars amount of taxes. in that given year. So some, some years it's really good some years. It's not, generally the more volatile years we can cash them more losses because there's more opportunity and more steady up years. there's not as much. So let's transition to, charitable giving strategies. So couple of things I want to mention here, and I mentioned last week as well. So one of the things you can do is, create a donor advised fund. So this is where you can start bunching your deductions, your charitable deductions with other things so that you can start itemizing, which we'll talk about. Here in just a little bit, but open up a donor advised fund. If you're already charitably inclined. And, you know, you're going to give a certain amount to your particular charity over a specific time period. You can start lumping these contributions into the stolen art. And continue giving that money to your particular charity. that you want to give to the next thing. Is qualified charitable distributions. So just like I said before, December 31st, you have a deadline to take your RMD, your required minimum distribution. But if you don't need that distribution, Like, Hey, I don't need that$10,000. At$30,000, whatever that distribution is, you can set up, what's called a qualified charitable distribution to avoid those taxes. and then you can give to your charity of choice. so those are two things that you can do. The other thing would be donating cash or appreciate it assets. So let's say you have a stock like apple, Amazon. whatever XYZ stock. That you have held for a while and it has just gone to the moon. and it's going to be. A tax bomb, essentially, for lack of better terms. Well, what you can do is you can start donating those appreciated stocks or gifting. donating those stocks to your charity of choice and so now you don't have to sell those stocks and receive. The the low cost basis and the taxes owed on all of those gains that you had within that particular holding. that's a good way to kind of eliminate before the end of the year. So go ahead. So think about, Hey, do I have appreciated assets that I can get rid of that I would have no problem getting rid of. Am I going to give to charity anyways, would this be more effective? Because I have. The stock that is going to Spit off some taxes, that I don't want to necessarily pay once. Give. This appreciated asset versus the cash. that I have sent around. And as I alluded to earlier, so how do we manage our income and deductions? so one thing we can do is we can accelerate or bunched deductions. with bunching deductions, especially with the Trump tax laws that came out and she has in 17 and were implemented in 2018. pretty much. The vast majority of people will not. itemize. And so one of the strategies that you can utilize so that you can itemize as bunching those deductions. So again, if you're charitably inclined, If you have a lot of medical expenses and things of that nature, then what you can do is you can plan ahead and you can pay more of those medical expenses. You can give more to the charities. And one year, and then the following year, it would be less. And so you would basically alternate years so that you can get over that, that standard deduction number and you can start to itemize. So with this strategy you would itemize one year and then you would take the standard deduction the next year and vice versa. And you would alternate years. allowing you to take advantage of. those tax deductions. And one year and then Sandra deduction and the volunteer. The next thing we want to consider is our HSA contributions and our FSA contributions. If you have not already done it. you have the opportunity to contribute to an HSA. make sure that you are. doing what you can, but ideally maxing that out. cause again, this is the only account that has triple tax advantage. You get a pre-tax deduction. as you put that in. You get a tax deferred growth, if you're able to invest it, and then you get a tax free distribution, if it's related to a health expense. we want to make sure that one, if we have taxes that we don't want to pay, this is a great way to put a, up to another$8,300 away. Tax-free. If you're a family and then individual will be a little bit less. so take advantage of this and just note that if you open up an HSA by herself and you contribute, through, let's say your bank account. You're going to miss the FICA. deduction. So try your best save. You're allowed to. To do this. Contribution through payroll deduction. So you get that extra, Vika detection as well. And then just want to reiterate. FSA funds. So flexible spending account. As similar to an HSA, in the fact that there's account with cash in it that you can put in pre-taxed but you can't invest it, it doesn't roll over a year to year. So if you have some money in there, and there's any sort of medical procedure or something medical related. That you need to have done, or someone in your family needs to have gun done. Go ahead and use that because you will lose those funds. and sometimes your employer lets you roll over a little bit. But a little bit is maybe a few hundred dollars. nothing substantial. Whereas if you had tens of thousands of dollars a year, He just say that just continues to roll up. You can invest it, things of that nature. So just to keep that in mind. If you have FSA, make sure you're using that money. number eight. We want to start to, look at our pay stubs and review our tax holdings and estimate payments. Right. if you work. For an employer or you have a W2. We want to make sure that we're holding a proper amount so that we're not surprised at the end of the year. Where they large tax bill and or a tax penalties for underpayment penalties. So we want to say, okay, well it's September. I'm going to make basically another 25%, of what I've made this year. And have I withheld enough for what's called my safe Harbor. tax payment. Number, essentially. if you've, held enough and you think, Hey, Based off my projections. I won't oh, anything or very little, or I don't have a very large refund then you're probably good to go. But if you get to April next year and you get a.$15,000 refund, or you have a$15,000 bill plus some penalties because you underpaid. Well, we need to adjust that withholding. So that we can fit our income. And meet that, safe Harbor number. Again, what the safe Harbor number is, is basically making sure that you're covering. Either 90% of your, future tax liability. So the tax season coming up, or 110% of the previous year's tax liability, whatever is the lesser amount. and so you would want to do the same thing. If you're a business owner or 10 99 contractor making estimated payments, you just want to start projecting those numbers and make sure. That you are hitting. those numbers and not caught off guard with either a large refund, because you're basically giving the government alone with no interest or, getting hit with, underpayment penalties there toward, April of next year. And so that's one thing that we do at Palm valley wealth management. We can run. A, we can review your tax return and come up with that safe Harbor number, review your pay stubs, review your quarterly payments and make sure that you're hitting those proper payments so that you can Avoid a large tax return check. Or avoid those on our payment. Pillories so that's the one thing that we do, we give this whole report and that's just one of the key things on that report as we review your tax return is what is my safe Harbor number? Am I. With holding enough in my check or my making proper quarterly payments. And once you have your plan set out to. maximize taxes for the 2024 tax year. You have your Roth conversion set up or RMDs or contributions that you're going to make to certain. Accounts. how are you going to rebalance or tax all's harvest? All those things set in place. The one thing you want to do is you want to review either your previous year tax return. Or set up a plan to review, your upcoming tax return. Once that is filed. and again, I kind of want to jump in to what we do at Palm valley wealth management. We have a software where we can run your tax return. And then we can come up with a bunch of information. And then from that information, we can start giving you, suggestions and ideas to work with your tax preparer, your CPA, to best. Help you with your tax situation and start to plan out. And. We said this before, you want to make sure that you're working with a CPA or a financial advisor that does tax planning. most tax preparers. This is doing exactly that they're praying your tax return. And they're only looking at that previous year and they're not considering, what the next 2, 3, 4, 5, 10 years looks like. over your lifetime to help mitigate those taxes. And as I've said at. At nauseum, especially in this particular episode. Taxes is going to be your largest expense, over your lifetime. So we need to create a plan and actively. I do the shadows each year to help mitigate those taxes. in this report, We're going to do. A couple of things. One, we'll give you a breakdown of what your total income is, what your AGI is, or your adjusted gross income, taxable income, basically all in a very organized way. And then give you your safe Harbor number. So again, if you're a business owner or you're just not sure if you're withholding enough within your paycheck, we can give you that number and say, okay, for 2025, this is how much I need to withhold or make quarterly payments to me, that number. So I'm not subject to a hundred payment or. Over, paying all my quarterly payments and, getting a large return back. And then we'll take a look at, do we have any losses that we captured in that previous year that we can. use moving forward, things of that nature. And then we can look at, well, where's this income coming from, especially our investment income. Are they qualified dividends? Are they ordinary dividends? is there areas where we can maybe tweak your investment portfolio to mitigate taxes? from the investment standpoint, whether that be getting into municipal bonds or, Government bonds or using different types of stocks that don't spit off. ordinary dividends, things of that nature. Maybe you have a large amount of cash in your bank getting interest that way. Are there ways that we can get similar interests and pay less taxes on them? And then again, we'll show you a list of, one, are we meeting our contribution? Limits. certain retirement accounts. Are we taking credit or getting credit for a certain tax credits like The child tax credit. American opportunity credit. And this is, pertaining to like, if you have kids in college and things of that nature, other types of credits and deductions as well. And then if you're at Medicare age, we're going to look at your Medicare bracket and make sure that you are not in the surplus range, where your. You're paying extra. So if we have the ability to lower your income, to a point where we can save you a little bit on your Medicare, we'll certainly do that. And then, the last thing we'll come up with some observations. What are some things that we can do this year and moving forward to help you save on your taxes, over your lifetime. Right? And so we'll give you some observations. And again, this is working in concert with your. Tax repair, because we don't prepare tax to the Palm valley wealth management. But we certainly want to take that in consideration Because anything that we do. from an investment standpoint. Or recommendation Sandpoint is going to affect your taxes. And so we want to make sure that all of that is in sync and going in the right direction or the correct direction. to best suit your needs. if you have someone looking and reviewing your tax return every year, great. If not, I would consider finding someone. with the expert, I to do that as well. And so that'll end the episode. four today. again, start thinking about those strategies that you can implement to save you some taxes. Now do not wait until the end of the year because you may just miss some deadlines or. Nyssa chance, Sue captures a losses. in your investments, whatever that may be, create an action plan now. If you need help with some of these topics, taxes are very complex. not our fault. Only the people that make the tax law. make a complicated, whether it's by design or not. And, so if you need that help, we would certainly be happy to do so to, so go to my website, Palm valley, wm.com. check our process out how we work clients, book a call again, no cost to you. schedule a call and answer as many questions as we can to help you out. And if we're a good fit, to work together. We can talk about that as well. again, if you liked this podcast, go ahead and share it with a friend and leave a five star review. And as always, this is for educational purposes only. Please seek a tax professional. If you're deciding to make any decisions about your tax situation, do not make decisions. on your tax situation off of this podcast alone. Go ahead and seek a professional, whether it be financial. Legal tax or insurance professional to, help you make specific decisions. about your situation and as always, please keep Palm valley wealth management in mind when making those considerations.