Investors typically put a lot of time and effort into building wealth and optimizing the growth on that money by making wise investment moves. An aspect of financial management that is just as important as building wealth — but often overlooked — is tax planning.
There are tax implications for every financial decision we make. Not understanding tax laws causes many investors to make costly — and often irreversible — mistakes. We have seen many people attempt the DIY approach to financial management in an attempt to save money, only to realize later that they missed an important tax detail that set them back a little — or, in some cases, a lot. With tax laws changing often, it’s difficult for those who are not financial professionals to keep up with it all.
One of the most valuable services your financial advisor offers is guidance on how various financial strategies might affect your tax burden. We collaborate with tax attorneys, CPAs and other professionals to ensure that we provide you with the best possible advice so tax planning becomes an integral part of your wealth-building strategy.
Implementing tax strategies that are appropriate for your situation can help you reduce your taxable income and help you save more for retirement if you’re in your working years. Here are just five of many potential tax-planning strategies to discuss with your financial advisory team.
1. Give to charity through your IRA
If you’re over 70.5 years old, you are allowed to gift directly to the charity of your choice through your individual retirement account (IRA) as a qualified charitable distribution (QCD). While this won’t reduce your taxable income, you won’t pay tax on the gift. You can gift up to $105,000 from your IRA in 2024.
If you‘re 73 years old, you‘re required to take required minimum distributions (RMDs) each year from your IRA. If you give a QCD, it will reduce the amount of RMD you pay tax on. For example, if your RMD was $50,000 and you didn’t gift a QCD, you’d pay tax on the entire $50,000. If, however, you gave $10,000 to a charity of your choice through a QCD, you’d pay tax on only $40,000.
If you are under 70.5 years old, there are other ways you can gift to charity and receive a tax benefit. If you’re itemizing your deductions, you can add your cash and noncash donations to the schedule to help reduce taxes. If you have an appreciated asset in a retail account, you can gift the asset directly to charity, thus avoiding capital gains tax.
When you itemize your deductions on your tax return, there are limits on how much you can deduct for charitable deductions each year. In 2024, cash donations can make up 60 percent of your adjusted gross income (AGI), and appreciated assets can make up 30 percent of your AGI.
If you donate more than the limit, you can move that amount forward to the next tax year. Please speak with your accountant if your donations are going to be above the limits because there are limitations on how long you can move the additional amount forward to the next tax year.
2. Find out if tax-loss harvesting might benefit you
Tax-loss harvesting can also be a good tax strategy to help reduce taxes. Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax you owe as a result of selling profitable assets. People use this strategy to limit short-term capital gains, which are commonly taxed at a higher rate than long-term capital gains, to preserve the value of their portfolios while reducing taxes.
In a retail account, there could be capital gains, or losses, associated with each position. If there is a tax loss, and you decide to sell the asset, you can harvest the loss and use it to offset any capital gains produced within the account that year. If you experience any loss after offsetting the gains, you can apply (up to) a $3,000 loss on your tax return. If you have any loss left over after that, you can move it forward to the next tax year.
3. Max out contributions to your retirement fund(s)
In your working years, you may have options to save for retirement through workplace vehicles such as a 401(k) or 403(b) plans or accounts you set up on your own (IRA, SEP, etc.) to help reduce taxable income. There are limits on the amounts you can save in these accounts. In many cases, it makes sense to max out your contributions; check with your advisor before doing so.
If you are funding a traditional 401(k), 403(b) or 457 plan through work, the contribution limit is $23,000. If you are over 50, you can make a catch-up contribution of $7,500, bringing the total amount to $30,500. If you are funding a traditional IRA (or Roth; however this vehicle won’t reduce your taxable-income figure), the maximum contribution limit is $7,000. If you are over 50, the limit is $8,000.
If you are funding both an IRA and a Roth, keep in mind that these limits apply to the total for contributing to both; you cannot both with $7,000.
4. Take advantage of your employer’s spending and saving accounts
If you are funding a flexible spending account (FSA) or health saving account (HSA) through work, those vehicles can also help you reduce taxable income. For an FSA, the maximum contribution is $3,200. For an individual funding an HSA, the maximum is $4,150, and it is now $8,300 for families. If you are over 55, you qualify for an additional $1,000 contribution.
5. Review your withholding amounts, and adjust them if necessary
It’s also important to review the federal withholding and state withholding amounts on earnings from your employer to make sure you are withholding enough. If you are in retirement, you’ll also want to review the withholding amounts on any IRA withdrawals, pension amounts, Social Security benefits, etc. If you aren’t withholding enough, you could be in the realm of penalties and interest charges.
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Some of the most common tax mistakes that investors make include making a large retirement withdrawal that bumps them into a higher tax bracket; buying and selling the same asset, such as a stock, in less than one year; miscalculating the cost basis on securities, real estate and other assets; and missing out on savings from tax-advantaged accounts. These are just a few examples of the many tax mistakes we’ve seen people make.
We encourage you to make tax planning a priority so you can avoid mistakes like these! Meet with your advisor to discuss how we can use tax planning to help you build, protect, and grow your wealth. As always, if you have any questions, please reach out to us or your accountant to discuss your specific situation.
Written by Christine Hayward | Partner, Wealth Advisor
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.
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