Tax Planning Ideas for All Seasons

The end of any tax year is a natural time to consider tax planning ideas for the year ahead — and beyond. What tax-related changes should you be aware of this year? We expect to see adjustments to tax brackets and other minor changes to the tax code. But the prospects for more impactful developments in the tax environment are still unclear.
To help fund the American Families Plan, the Biden administration proposed a near doubling of the capital gains tax rate for individuals earning more than $1 million a year and an increase in the top marginal income tax rate to 39.6 percent, where it stood before it was reduced to 37 percent in 2017. Currently, the legislation sits idle in Congress, and its future is uncertain — but we will keep a close eye on any developments.
For now, you may want to consider some evergreen tax planning ideas, including the following:
Tax-loss harvesting: Often thought of as a year-end strategy, tax-loss harvesting is worth considering throughout the entire year. When the market is down — as it has been for the first few months of 2022 — you might consider selling investments that have lost value and using the losses to offset income from capital gains. If you have more losses than gains, you can use up to $3,000 per year to offset ordinary income on your federal taxes, and you can carry over any unused capital losses to future years. It is important to remember that the IRS’s “wash sale” rules prohibit claiming the losses if you purchase a near-identical investment 30 days before or after selling a position at a loss. Be sure to consult with your advisor before embarking on a tax-loss harvesting strategy.
Backdoor Roth IRA: If your income is too high to contribute to a Roth IRA, you might consider the “backdoor” method. Essentially, you put money into an existing (or new) traditional IRA and then convert your contribution to a Roth IRA. Suppose you are converting the entire traditional IRA. If you have prior investments in any IRA, then great care needs to be taken when allocating basis in your roll over to a Roth IRA. You will need to pay taxes on any pre-tax (deductible) contributions and taxes on any earnings and appreciation from the transferred assets. However, the tradeoff may be worth it to gain the main advantage of a Roth IRA: tax-free earnings and withdrawals.[1]
“Bundled” charitable contributions: If you are on the margin between taking the standard deduction or itemizing, you could benefit by bundling two years of charitable contributions into a single year. You could then itemize in the current year and take the standard deduction in the next, resulting in larger cumulative deductions than if you didn’t bundle your charitable gifts. To enact this strategy, you might consider using a donor-advised fund, which gives you flexibility in awarding charitable gifts. In addition, by donating appreciated stocks that you have held for more than one year directly to a donor-advised fund, you could avoid the capital gains taxes due if you sold the stocks and then donated the proceeds.
Qualified charitable distribution (QCD): Generally, once you turn 72, you must start taking taxable withdrawals—technically called “required minimum distributions,” or RMDs — from some of your retirement accounts, including traditional IRAs. But a qualified charitable distribution (QCD) — which involves moving money directly from your IRA to a qualified charity — can satisfy some, or possibly all, of your RMDs for the year. The maximum amount that can qualify for a QCD is $100,000 per year, per spouse.
Health Savings Account (HSA): If you have a high-deductible health plan (HDHP), you can generally contribute to an HSA, which has triple tax advantages: your contributions are made with pre-tax dollars, reducing your taxable income for the year; your earnings grow tax-free; and your withdrawals are tax-free, provided you use the money for qualified medical expenses. In addition, you can carry over the money in your HSA from year to year—in other words, you don’t have to “use it or lose it.” 


Tax planning for your unique situation


To discuss these or other possible tax planning strategies based on your specific circumstances, please get in touch with the BDO Wealth Advisors team. We will review your investment and tax situation to help determine the opportunities that best meet your needs.