Your Money: A year-end tax-planning checklist

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Bruce Helmer and Peg Webb

For many investors, taxes represent their biggest investment expense, consuming upwards of a third of their earnings, depending on how the assets are held. Today’s article is focused on the things you can do between now and the end of the year to lessen the impact of taxes on your 2023 tax returns.

Lower your tax bill with tax-loss harvesting

Many investors take tax losses at the end of every year for a big tax benefit, also looking at it as a kind of consolation prize for making a bad investment pick. Tax-loss harvesting is a strategy that allows you to offset some of your realized capital gains with realized losses.

To know if tax-loss harvesting is viable for you, you need to know your tax rate. For the 2023 tax year, it is a top rate of 20% for long-term cap gains — depending on your income. The rate that applies to your income could be 0%, 15% or 20% (the IRS says most people pay no more than 15%). The ordinary income tax rate that applies to short-term gains and qualified taxable distributions maxes out at 37%, but, again, the range is income dependent, beginning at 10% and rising in increments to 12%, 22%, 24%, 32%, 35% and 37%.

Some mutual funds have been throwing off sizable distributions in both short- and long-term gains; these need to be factored into your consideration of whether to use tax-loss harvesting. Keep in mind that capital losses may also be applied to current or future cap gains and income, which the Tax Code limits to $3,000 per year plus carryforwards. This means if you had significant investment losses in 2022 or previous years, you may have tax-loss carryforwards that can be applied to your 2023 tax bill.

As always, we recommend checking with your financial adviser or accountant to see if tax-loss harvesting is appropriate for your situation and tax bracket, for several reasons. For example, end-of-year rebalancing of your portfolio may be appropriate if market performance has put your target allocation out of whack. While selling a low-performing asset could help restore your desired allocation, you need to pay attention to cost basis. It generally doesn’t make sense to realize a tax loss if the sale doesn’t fit your portfolio or investment strategy or if you reasonably expect the investment to recover value in the next year or two. Plus, you need to consider the wash-sale rule that applies to the sale and repurchase of “substantially identical” assets for 30 days before and after the sale.

Tax-gain harvesting may help you avoid the related risk of higher capital gains tax rates by selling appreciated assets in lower-income years if you happen to be in a lower tax bracket. You’ll pay 0% in federal capital gains tax if you meet certain income thresholds ($89,250 if you’re married-filing-jointly or $44,759 if you’re a single filer). Tax-gain harvesting also can be useful for pass-through businesses with an expected operating loss in 2023 but that expect to be profitable in 2024.

Retirement planning is getting more complicated

Higher-than-normal inflation, rising interest rates and increased uncertainty about the direction of the economy are clouding the retirement landscape for many investors. We continue to counsel clients to use long-term inflation assumptions of 2% to 3%, especially when modeling your income needs over a retirement that could last two or three decades.

Rising interest rates are generally helpful for retirees on fixed incomes, but can be hazardous to stocks if rates pass certain thresholds. This is a good time to revisit your target asset allocation and make sure it still reflects your investment goals and risk tolerance.

And economic uncertainty can create “sequence of returns” risk if you are planning to retire in the near term. This occurs when you take out big withdrawals early in retirement when the market’s down. Remember, it’s generally better to minimize principal withdrawals during a market downturn early in retirement.

Against these unknowns, we urge investors to focus on what you can control if you are near or in retirement. That means maximizing contributions to tax-deferred accounts, making sure to take any required minimum distributions (RMDs) before Dec. 31, 2023, and considering a Roth IRA conversion, especially if you anticipate needing to minimize taxable income during your retirement years.

Review tax withholding in view of higher interest rates

Your interest income from savings accounts and other interest-bearing investments accounts may generate significantly higher Form 1099s this year. Don’t get caught off guard with an unexpectedly high tax bill. Increase your withholding amount if you anticipate that interest income could put you into a higher tax bracket. It could help you avoid getting stuck with a higher tax bill in April.

With interest rates higher than they’ve been in decades, you need to be aware of which interest-bearing accounts are taxable and which are tax-exempt. Treasury bills and government money market funds, for example, are exempt from state taxes. But interest paid on bank savings accounts, prime money market accounts and certificates of deposit (CDs) are not. Asset location is almost always as important as asset allocation when it comes to tax planning.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.


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