It’s Beginning To Look A Lot Like Yearend Tax Planning Season

Earlier this year, we wrote about the tax planning opportunities presented from the SECURE Act 2.0. As we near the end of this year we wanted to highlight some of the timeless tax strategies that we focus on in our discussions with clients.

• Maximize the use of tax-deductible retirement plan contributions each year to lower your tax liability as much as possible. This includes employees with the option to use 401k plans, and also IRA savers who can continue to make contributions even after age 70½.
• Make annual or one-time gifts of securities to family members to transfer taxable income and future gains from your portfolio to others, potentially reduce family-wide tax liability, and reduce your taxable estate during your lifetime. (The annual gift tax exclusion amount went up to $17,000 from each giver to each recipient this year.)
• Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund (DAF). The tax deduction is based on the value of the gift in the tax year of the gift, and tax liability on any unrealized capital gains is eliminated for you.
• Concentrate multiple years of charitable gifting into one year (referred to as “charitable bunching”) in order to maximize the tax deduction benefits of giving.
• Consider qualified charitable distributions (QCDs) from IRAs for those over age 70½, especially if you would not otherwise receive as advantageous a tax deduction for gifting taxable assets. QCDs also count towards any required minimum distributions, but are limited to $100,000 each year.
• Consider a Roth IRA or Roth 401(k) conversion, or even discretionary taxable distributions of IRA assets, especially if this will be a low-income-tax-rate year for you and/or when asset values are down. If you have not begun taking required minimum distributions (RMDs) from IRAs, this strategy will also help reduce or eliminate your pre-tax traditional IRA assets before your RMDs kick in.

In our portfolio management, we regularly look for opportunities throughout the year to maximize after-tax portfolio returns beyond investment selection, allocation, and periodic rebalancing. As part of our strategic focus on tax sensitivity in managing investment strategies we utilize some of the following techniques in our client portfolios:

• We aim to hold investments in taxable accounts for more than one year before selling them so that long-term capital gains tax rates will apply. The tax difference can be significant. (However, we always assess the potential risk and return tradeoffs that result from any decision to extend an investment holding period.)
• When raising cash, we do so by selecting securities or individual tax lots of a security that have the lowest taxable gain consequences.
• We consider carefully before selling investments with large built-in gains, unless the sale is justified by a higher expected return from another investment or is necessary to maintain portfolio asset allocation objectives.
• We seek to place the interest-earning portion of portfolios in tax-deferred accounts given interest income is taxed at the top marginal rate, unlike long-term capital gains.
• For portfolios without significant tax-deferred assets, we will generally recommend holding tax-exempt bonds in lieu of taxable bonds, depending on the client’s marginal tax rate.
• We look for opportunities to “harvest” capital losses if there is market volatility throughout the year, as well as during our year-end review. These realized losses can then be used to offset realized gains elsewhere within or outside the portfolio, either in the same tax year or rolled forward to future tax returns. Proceeds can then be placed in comparable investments so the portfolio allocation remains intact.
• We consider any anticipated taxable year-end distributions from investments within a portfolio when rebalancing, raising cash or harvesting taxable losses.

As always, we welcome the opportunity to discuss these planning topics with our clients and to coordinate with their tax advisors to determine the best techniques for each client’s individual tax situation. Please contact your Advisor for more information and to review your situation.

Note: As with all tax planning strategies, every person’s situation is different. We suggest consulting with your tax advisor before implementing any of these tax planning techniques.

KEY TAX CHANGES IN 2023 & 2024

In addition to the changes that became effective this year with the SECURE Act 2.0, several other tax related changes went into effect that may impact your tax planning situation. Here are a few key highlights for changes effective starting 2023 and the changes expected for 2024:

Important Disclosure

These materials have been provided by Litman Gregory Wealth Management, LLC (“LGWM”) for informational purposes only. No statement herein is to be construed as a solicitation or recommendation to buy or sell a security. The information contained herein has been derived from sources that we believe to be reliable; however, we do not make any representation as to the accuracy, timeliness, suitability, completeness or relevance of any information. Information contained herein is current as of 12/31/2022. It is subject to legislative changes and is not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances. This material is furnished ‘as is’ without warranty of any kind. Its accuracy and completeness are not guaranteed, and all warranties expressed or implied are hereby excluded.

For additional information about LGWM, please consult the firm’s Form ADV disclosure documents by contacting compliance@lgam.com or through this link.