Earlier this year, we wrote about key changes and planning opportunities that emerged with the passage of new tax legislation. As we approach the end of this year, we want to highlight some of the tax strategies that we focus on in our discussions with clients. The following are some of the opportunities that may be available to help minimize taxes as well as strategies that continue to be effective ways to optimize tax outcomes year after year.
- 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 or other similar retirement plans, and also IRA savers who can continue to make tax-deductible contributions even after age 70½ if they still have earned income.
- Make annual or one-time gifts of securities to family members to transfer future taxable income and gains from your portfolio to theirs, which may reduce family-wide tax liability and reduce your taxable estate during your lifetime. (For 2025, the annual “gift tax exclusion” amount is $19,000 from each giver to each recipient.)
- Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund (DAF).Your tax deduction is based on the value of the gift in the tax year of the gift, and may remove your tax liability on any unrealized capital gains (subject to IRS limitations and eligibility rules.) Be aware that to receive the full tax benefit of your charitable gifts your itemized deductions will need to exceed the standard deduction amount.
- Consider concentrating multiple years of charitable gifting into one tax year (which we refer to as “charitable bunching”) to maximize the tax deduction benefits of gift amounts above the standard deduction.
- Consider qualified charitable distributions (QCDs) from IRAs for those age 70½ or over, especially if you would not otherwise receive as advantageous a tax deduction for gifting taxable assets. QCDs also count towards any required minimum distributions (RMDs), but each IRA owner is limited to a total of $108,000 in QCDs for 2025. Unfortunately, a QCD cannot be made into a donor-advised fund (DAF) account, and must be donated directly to a qualified charity.
- Consider a Roth IRA or Roth 401(k) conversion from a tax-deferred IRA, or possibly make discretionary distributions of taxable IRA assets, especially if this will be a low-income-tax-rate year for you and/or if you have an IRA account where values are down. If you have not begun taking required minimum distributions (RMDs) from IRAs, this strategy may also help reduce the balance of your pre-tax traditional IRA assets before your RMDs begin. Note that Roth conversions and distributions can increase current-year taxable income and may have additional tax consequences; consult your tax advisor.
In addition to the strategies just described, we regularly look for opportunities throughout the year to maximize after-tax portfolio returns. These are techniques that are mostly individualized to each client and go beyond the investment selection, allocation, and periodic rebalancing that are part of our core portfolio management.
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. (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
- 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, which are taxed at preferential rates.
- For portfolios without significant tax-deferred assets, we will generally recommend holding some 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 years (subject to applicable IRS rules, including wash sale rules.) 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.
We welcome the opportunity to discuss these planning topics with you and to coordinate with your tax advisor to determine the best techniques for your individual tax situation. Please contact your Advisor for more information and to review your situation.
Note: As with all tax planning strategies, every situation is different. We suggest additional consultation with your tax advisor before implementing any of these tax planning techniques.
Key Changes in 2025 and 2026
| 2025 Limit | 2026 Limit | |
| 401(k) / Employer-Sponsored Plan Contribution | $23,500 (+$7,500 catch-up age 50+; $11,250 for ages 60–63) | $24,500 (+$8,000 catch-up age 50+; $11,250 for ages 60-63) |
| IRA Contribution (Traditional/Roth) | $7,000 (+$1,000 catch-up age 50+) | $7,500 (+$1,100 catch-up age 50+) |
| Annual Gift Exclusion | $19,000 per recipient | $19,000 per recipient |
| Estate & Gift Tax Exemption | $13.99 million per person | $15 million per person |
Important Disclosure
This material is provided for informational and educational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security or to implement any strategy. Any strategy described may not be suitable for all investors and depends on individual facts, objectives, risk tolerance, time horizon, and tax circumstances. Tax laws and IRS limits are complex and subject to change; consult your qualified tax professional and/or legal advisor before acting.
Investment advisory services are offered only by Litman Gregory Wealth Management (registration does not imply a certain level of skill or training) and only in jurisdictions where permitted. Investing involves risk, including possible loss of principal. No guarantee is made that any strategy will be successful, achieve any targeted outcome, or reduce taxes.
Tax management techniques (including tax-loss harvesting and asset location) involve limitations and tradeoffs, may not be available in all market environments, and may have tax consequences (including the application of wash sale rules). Roth conversions and IRA distributions can increase current-year taxable income and may affect tax brackets and other tax-based calculations. There is no guarantee that any strategy discussed will achieve a particular result, reduce taxes, or improve investment outcomes.