The Importance of Year-End Tax Planning

Timothy Brown |

By Timothy Brown, MBA, CFA®, CFP®, RICP®, AIF®

The tax filing deadline of April 15, 2022, may seem like a long way off, but now is the time to start preparing for it. Did you know taxes are among one of the largest expenses in retirement? You should also know there’s a number of ways to potentially lower your tax bill between now and then. 

At Brown Wealth Management, our advisors are here to help you make time-sensitive decisions about your tax situation. An important part of how we do that is by helping you find opportunities to lessen your tax burden and improve your strategy. While tax preparers are focused on what has already happened, tax planners look ahead to create a plan beforehand. 

We want our clients to know the importance of tax planning, and you can start preparing with these simple steps. 

Get Familiar With Your Tax Situation 

You should always know which tax bracket you’re in, but you should also know where you’ll stand in the future. For instance, let’s say you’re in the 12% bracket today, and there’s a chance you could jump to the 22% bracket when RMDs begin. In this case, you should consider increasing your income this year to maximize the 12% bracket by using strategies such as Roth conversions or realizing long-term gains.

However, if you’re in the 24% bracket today and will likely move down to the 12% bracket later, you should consider deducting more income through retirement account contributions or by bulk gifting with a donor-advised fund if you’re feeling charitable. Overall, it’s a good idea to try to maintain your tax rate level throughout retirement and pre-retirement as much as possible. 

It’s also important to keep in mind that many tax opportunities are time-sensitive. The deadline for realizing your capital gains or losses this year is December 31, 2021. In fact, realizing capital losses can provide flexibility on when your assets are taxed. In addition to this, Roth conversions are also due on the last day of this year while IRA or Roth IRA contributions are due on Tax Day, April 15, 2022. 

Key Strategies to Help Lessen Your Tax Burden 

Donate to Charity 

Whether you’re just a naturally generous person or are always looking for ways to give back around the holidays, I always recommend charitable giving during this time of year. While it’s a kind gesture, charitable giving also has the advantage of being a great way to minimize your tax burden, especially for those who bring in a higher income than most. 

Generally speaking, the key to reducing your tax burden is reducing your income. This is often referred to as your adjusted gross income (AGI). By donating a portion of your wealth to charity, you not only give back to a community or support a cause of your choice, but you’re also working toward a more tax-advantaged AGI. However, before receiving the deduction, you must donate your money to a qualified charity before the last day of the year. But what’s the most efficient way to make your donated money work for you? 

For starters, you can donate through donor-advised funds (DAFs), which act as charitable foundations. Once you allocate money into the DAF, you can deduct the amount from this year’s taxes and then recommend where you want your funds to go later. 

Donate Your Required Minimum Distribution 

Another way you can minimize your tax liability is by considering making qualified charitable distributions using your required minimum distribution (RMD). If you’re 70.5 (1) and have an RMD, you might be able to save money on taxes by contributing it to a charity of your choice. 

You can exclude this money from your AGI, which could further reduce your tax burden by the end of the year. 

Empty Your Flexible Spending Accounts 

Flexible spending accounts (FSAs) allow you to save money on a pretax basis. You can use these tax-advantaged funds throughout the year to pay for medical expenses such as copayments or other deductibles. This means that any contributions you make to your FSA plan will not be subject to income taxes. 

After the money is put into your FSA, you must submit receipts for eligible expenses before they can be reimbursed. A big reason why you should empty your FSA account is that you must use all the money you set aside each year, or the contributions could be forfeited. 

Take Advantage of Your HSA 

If you don’t know by now, a health savings account (HSA) allows you to save money on a pre-tax basis to pay for certain medical expenses. Generally, you’re allowed to use these funds to pay for copayments, deductibles, and other expenses to potentially lower your overall healthcare costs. 

Additionally, because you won’t have to pay taxes on this money, you can exclude this account from your adjusted gross income, which could potentially lessen your tax burden as well. 

Contribute to Retirement Accounts

Maximizing your retirement savings is an optimal way to save on your taxes as well as increase your nest egg. If your employer offers a 401(k), you can contribute up to $19,500 in 2021. If you are over 50, you can also take advantage of catch-up contributions of an additional $6,500. If you don’t have the opportunity to save through an employer-sponsored plan, you can still invest in an IRA or Roth IRA. IRA contribution limits for 2021 are $6,000 per person, with an additional $1,000 for those over 50.

We’re Here to Help 

If you want tax efficiency as part of your financial plan, you should reach out to an advisor who understands your situation. Most tax preparers and other advisors can help you file your taxes and know general information, but they’re not willing to coordinate with other professionals such as a certified public accountant or tax attorney. That’s where we come in. 

We at Brown Wealth Management want to help you and your family prepare for all of life’s milestones and events. We want to help you lead a more fulfilling life and become more confident in your financial decisions. Tax planning can be difficult, but you don’t have to do it alone. If you need help with your year-end tax planning, schedule a free introductory call today by reaching out to us at (952) 303-6715 or https://www.brownwealth.com/getting-started.

Disclosure

We are not tax preparers or tax professionals. 

About Tim

Timothy Brown is founder and president of Brown Wealth Management, an independent, full-service wealth management company that helps individuals and families prepare for all of life’s milestones and events. With more than 20 years of experience in the financial industry, Tim strives to help his clients live happier, more fulfilling lives with the confidence that they have been good stewards of their finances. Tim has a bachelor’s degree in finance and accounting from the University of Colorado and an MBA from the University of Minnesota’s Carlson School of Management. In addition, he holds a rare combination of credentials: Certified Financial Planner™(CFP®), Chartered Financial Analyst™ (CFA®), AIF® - Accredited Investment Fiduciary™ (AIF®), and Retirement Income Certified Professional® (RIPC®). Tim has been recognized for his hard work by receiving the Five Star Wealth Manager award in both the Mpls.St.Paul Magazine and Twin Cities business magazine since 2013. 

When he’s not working, Tim enjoys spending time in Eden Prairie with his wife, Stacey, and their four children. You can often find him keeping busy by staying fit, pursuing a black belt in Tae Kwon Do with his three boys, assisting kids with Boy Scouts, and attempting to read two books per month. To learn more about Tim, connect with him on LinkedIn.

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(1) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions