Give Yourself the Gift of Savings: The Holiday Financial Checklist

By November 27, 2023Uncategorized

As the holiday season rapidly approaches and signals the end of the year, it’s also your last opportunity to take advantage of these financial strategies that can help your bottom line and potentially save you a bit of money.

Tax Loss/Gain Harvesting For Stock Sales

With the crazy ups and downs of the market over the course of this year, you might have been fortunate enough to have sold some stocks at a gain. As we get to the end of the year, review your portfolio to see whether there are stocks you might want to sell at a loss before the end of the year to offset the gains. This strategy is known as “tax harvesting”.

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that amount can be carried forward to offset capital gains in upcoming years.

Even if your investments qualify for the long-term capital gains tax rate, you might want to consider harvesting this year if you are above the net investment income tax (NIIT) threshold. Otherwise, you will pay an extra 3.8% for NIIT above the income threshold.

If you have a large amount of capital gains this year, qualified opportunity zone funds may help you defer some taxes. Opportunity zone funds are investments that have the specific purpose of spurring economic and job growth in low income or distressed areas. These funds can defer your capital gains taxes, but have complicated implications and require that you be an accredited investor. Please consult with a financial advisor before making this type of investment.

Conversely, if you expect to be in a lower tax bracket this year, you can “harvest” capital gains. In this case, you sell investments with gains because you will pay relatively lower taxes this year as compared to a year with a normal/higher level of income. You can even take the opportunity to convert some of your IRA savings to Roth. The amount you convert is taxed as ordinary income but, once that savings has been transferred to a Roth IRA, it won’t be taxed again. If this is your situation, definitely consult with a trusted financial professional to maximize your harvest.

Roth IRA Contributions

Check if you qualify to contribute to a Roth IRA. The Roth IRA income limits for tax year 2023 are less than $153,000 for single/head of household taxpayers and less than $228,000 for those married and filing jointly. Although the deadline for Roth IRA contributions is actually April 15 next year, the idea of contributing to your IRA often falls between the cracks during tax filing season, so it’s a great idea to make that contribution now if you can.

Higher income taxpayers who are over the income limits are not allowed to contribute directly to a Roth IRA. But they are allowed to convert a Traditional IRA to a Roth IRA. This exception is commonly known as a “backdoor Roth IRA”. So if your income is higher than the Roth IRA contribution limits, you can use this technique instead. While “backdoor Roth IRAs” are not explicitly illegal, they do fall into a gray area, so double check with your financial tax advisor to make sure you have all your bases covered.

Note that If you are taking money from an IRA that has never been never taxed, this money will now be taxable. For example, if you contributed to a Traditional IRA and subsequently claimed the contributed amount as a tax deduction, you will have to pay taxes on the amount when moving it to a Roth IRA. But once the money is moved into a Roth IRA, it won’t be taxed again.

Deferring Income

Some companies offer deferred income options for employees who are Director-level and above. With deferred income, instead of receiving the income and getting it taxed in the year it is earned, you may elect to receive the income in a future year and have it be taxed then. By doing so, you can spread out your tax liabilities and potentially even get the deferred amount taxed at a lower rate. However, deferred income is not guaranteed and can be lost if something were to happen to your company. So it’s not just a tax decision, but a bet of sorts on your company’s future success.

If you work for a company that offers such an option, now would be a great time to check with your financial advisor to see if it’d be worth it to defer a portion of your income.

Incentive Stock Options/Alternative Minimum Tax

If you have exercised incentive stock options/restricted stock units this year, or are considering it, you might be at risk for invoking Alternative Minimum Tax (AMT). AMT is a different formula the IRS uses for high income individuals, including those who realize a significant portion of their income from the exercise of incentive stock options/restricted stock units. Among other things, the AMT formula counts as income the difference between the market price and the option price for incentive stock options. You would then pay the higher of the AMT or your regularly calculated taxable income.

If you have or are planning to exercise incentive stock options this year, now would be a great time to run through the AMT calculation with a qualified tax professional to see if AMT will affect your tax bill.

Don’t wait until after the new year or tax season to carry out financial strategies that can help you now. This is just a partial list of things you can do. For a list of more basic end-of-year strategies, check out this past article.