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Year-End Tax Planning
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Year-End Tax Planning
7 Strategies to Consider
A Money Question
My Latest
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Year-End Tax Planning
Here is what I find interesting about taxes and tax planning.
Nearly no one I come across is maximizing their tax benefits but they are often blissfully ignorant to that fact.
Year after year, they leave the IRS a tip, and if you pointed it out, they might blow a gasket, but again, they are blissfully ignorant.
Now look, if you think this might be you…rest assured this was me for about a decade.
In fact, I would estimate I have overpaid the government a few hundred thousand dollars in taxes.
It wasn’t because I wanted to, no it was just that I didn’t understand what things I should be thinking about.
So today, I am going to give you seven strategies from easiest to hardest to consider before the end of the year.
Let’s dive in!
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7 Tax Strategies to Consider
When I think about tax planning, I view it through a three-pronged lens.
First, what tax bracket are they in today and what do we project to be in down the road?
Example: A high tax bracket today means the focus should be on differing taxes while a low tax bracket today might mean paying tax now to avoid future taxes.
***Remember taxes are a lifetime game, not a yearly one.
Second, I think about what level of complexity this might add to their lives. Some clients are like me and value simplicity while others would consider moving to Puerto Rico to save more in taxes.
Third, as with most things in the tax code (and the strategies that follow), it is up for interpretation.
I like to think about tax planning in terms of 0-10. Zero means there is no gray area while ten means you are making a valid argument but you better have the goods to back up.
So remember with these strategies consider your situation, your complexity barometer, and your proof to back up your tax planning moves.
1) Qualified Accounts
Think of a qualified account as everything you get a current year or future year tax benefit for contributing to.
Here is a list of the most common ones we use:
HSA
401(k)
Sep IRA
Roth IRA
Solo 401(k)
Each of these plans can be a great option depending on your situation. The key is going back to our three-pronged approach and understanding your situation first then determining which accounts make the most sense.
2) Tax Gain/Loss Harvesting
All of our clients have significant money outside of qualified accounts (see above). That means the way we invest, rebalance, and strategize around this money has significant tax consequences.
The two moves that come up each year with clients are tax gain harvesting and tax loss harvesting.
It works like this:
Gain Harvesting - A client is in a low tax bracket and has room before the next tax bracket (think 24% to 32%). We might take some portfolio gains while still staying in the 24% tax bracket.
Loss Harvesting - A client has a position that is down in value. We can sell that position, immediately rebuy an equivalent position, and capture the “tax loss”. This positions us to take $3,000 of that against their ordinary income and carry the additional losses forward as a tax asset for future years.
3) Roth Conversions
Roth accounts are a type of qualified account that receives no tax benefit when contributing but receives tax-free growth, and distributions while avoiding required minimum distributions.
I love these accounts!
A Roth conversion is when you take money from a traditional qualified account (think IRA) and convert (think move) money to the Roth version of that account.
It is great for someone in a lower-income year. You prepay your tax bill (which isn’t fun) but often it can save someone thousands off their lifetime tax bill.
***I put my money where my mouth is and have converted nearly $1,000,000 over the past few years from traditional to Roth. Sure I paid taxes up front but I estimate this to save me millions off my lifetime tax bill.
4) QBID
95% of our business owner clients are taxed as an S Corp. The key thing to know is that is a pass-through entity, as in all the money you make whether you take it out of the business or not it is taxed in the year you earn it.
Pass-through entities have a tax deduction available known as the Qualified Business Income Deduction (QBID).
In short for most of our clients, they are earning enough money that they get to deduct either 50% of W2 wages or 20% qualified business income.
We have seen these deductions total hundreds of thousands when planned correctly.
Pro Tip - You can pay yourself a reasonable salary and provide a bonus (through payroll) at year-end to maximize wage income for QBI. It ensures you maximize this deduction and allows for future flexibility on your salary.
5) Charitable Giving
Giving is about the heart, not the tax benefit, yet I have never met anyone who wants to give more to the IRS and less to their favorite charity.
To maximize your giving, you must first understand the biggest mistake people ~ not accounting for the standard deduction.
The standard deduction in 2024 is $14,600 for a single filer and $29,200 for married filers. This means that everyone (no matter what) gets these deductions.
So without proper planning, your charitable contribution provides you no tax benefit.
Example: If you give away $10,000 per year but do not have additional deductions above and behind the standard deduction, you receive the same tax benefit as someone who gave away no money.
This is where charity (the heart) meets strategy (the tax benefit).
Consider grouping together a few years of donations and utilizing a Donor Advised Fund. A DAF is a special type of account that allows you to receive the current year's tax benefit but then give the money to the charity over time.
Pro Tip - Combine a DAF with giving of appreciated securities to double your tax benefit. Remember giving away cash is nearly always the least tax-efficient option.
6) Maximizing Depreciation
Arguably the best tax strategy in America is this:
Own a cash-flowing small business (tax code is built for business owners) and invest those profits in real estate (as a real estate pro).
In theory, this allows you to capture paper losses on your real estate to offset income earned through your business.
Now look, this is far harder than TikTok makes it seem as you need to buy good real estate, qualify as a real estate pro, optimize for taxes, and hold it forever.
But what everyone can do is understand what depreciation options are available and how they should be positioned.
Example: If you own a short-term rental you can bonus depreciate that property while not being a real estate pro to offset ordinary income.
This strategy requires specific planning for your situation and a desire to add complexity.
Remember you are owning real estate and while often described as “passive income”, it is far from a passive endeavor.
7) Level 2 Strategies
Everything listed above can be classified as a level 1 tax strategy.
They are clear-cut opportunities to lower your lifetime tax bill.
Level 2 strategies require specific circumstances, a willingness to add complexity, and typically a net worth high enough for it to make sense.
Here are 10 examples:
Augusta Rule
Installment Sales
Intra Family Loans
Opportunity Zones
Grouping Elections
Charitable Remainder Trust
Family Limited Partnerships
Spousal Limited Access Trust
Qualified Small Business Stock
Incomplete Gift, Non-Grantor Trusts
The above strategies make sense for the right person in the right circumstances at the right time.
That person is typically in the .01%, not the 99.9%.
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While blissful ignorance of taxes can be freeing, you are probably still overpaying.
You owe it to yourself to ensure you are maximizing every available tax move.
After all, my mom always told me money doesn’t grow on trees.
Until next time my friends!
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A Money Question
What tax planning move have you implemented this year?
I’ll start, one thing we have done this past month is further optimize our payroll to Moment partners.
This will ensure we both pay the lowest amount of legal tax possible.
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3 Ways I Can Help You
💰 Schedule an introductory call with Moment. We help athletes, entrepreneurs, and key employees build and protect wealth.
📹 Check out my YouTube channel. A safe place to get smarter with your money.
📷 Interact with me on Instagram. Where I provide bite-sized daily content to level up your money game.
Moment Private Wealth, LLC is a Registered Investment Advisor, located in the State of Missouri. Moment Private Wealth provides investment advisory and related services for clients nationally. Moment Private Wealth will maintain all applicable registrations and licenses as required by the various states in which Moment Private Wealth conducts business, as applicable. Moment Private Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or under an applicable state exemption or exclusion. Nothing in this content is intended to be, and you should not consider anything in this content to be, investment, accounting, tax, or legal advice.