TAX-PLANNING STRATEGIES

TO CONSIDER BEFORE YEAR END

By Emily Due

November 2, 2022

As we approach the end of the calendar year, there is still time to implement tax-planning strategies that can help you minimize your tax burden in 2022 and/or longer term. This article provides an overview of potential options that our wealth advisors at The Mather Group, LLC (TMG) are available to discuss.

ROTH CONVERSIONS

The end of the year may be an optimal time to consider a Roth conversion because income and tax brackets can be easier to estimate. (However, TMG wealth advisors actively look for Roth conversion opportunities throughout the year.) Roth conversions allow you to take a portion of your qualified pre-tax retirement account assets (traditional individual retirement accounts (IRAs), rollover IRAs, etc.) and convert them to a Roth IRA. The conversion creates taxable income for the year in which it occurs and cannot be undone. However, despite incurring this initial tax liability, Roth conversions can offer several long-term benefits.

By decreasing the tax-deferred account balance on which your required minimum distributions (RMDs) are calculated, you reduce your RMDs and thereby reduce taxable income long term.
Roth accounts act as a long-term hedge against increasing tax rates, whether those increases result from higher income or changes to tax law.
Not only does reducing RMD income lower taxes long term, it also decreases Medicare premiums during RMD years.
Assets that are converted to a Roth account grow tax free during and beyond your lifetime, creating a tax-efficient way to transfer wealth to beneficiaries.

CHARITABLE STRATEGIES

If you are currently subject to RMDs, and you have not yet fulfilled your 2022 RMD obligation, you can make Qualified Charitable Distributions (QCDs)¹ directly to charitable organizations. QCDs allow charitable giving directly from an IRA to an eligible charity for up to $100,000 per person per year. The QCD lowers your taxable RMD, which lowers your adjusted gross income (AGI) dollar for dollar—meaning that you do not need to claim the itemized deduction to benefit from this charitable strategy. TMG wealth advisors evaluate your charitable giving goals and the amount of your RMD to see if this strategy aligns with your situation.

With the Tax Cuts and Jobs Act (TCJA) increase in the standard deduction, fewer people are itemizing their deductions. However, if you have nonprofit organizations that you are committed to supporting for some period of years, you may consider accelerating your charitable giving contributions and lumping them into one year, which would likely make your itemized deductions larger than the standard deduction.

Donor Advised Funds (DAFs)² are a common tool that allow an individual to take a significant itemized deduction in the current year while providing the opportunity to support organizations with ongoing distributions in later years. Although not appropriate in all circumstances (TMG wealth advisors can provide guidance on whether or not this type of giving fits your circumstances), DAFs have several advantages:

When investments are contributed to a DAF, you can avoid tax on the long-term capital gain.
Assets within a DAF grow tax free since they are earmarked for charity.
By consolidating multiple years of giving into one donation, you are able to take a larger deduction than if you were to give annually. You may be able to deduct as much as 20% to 60% of your AGI depending on the type of asset donated.³
A DAF contribution lowers taxable income, which provides more room for other tax-planning strategies (for example, Roth conversions discussed earlier).
DAFs can make charitable giving anonymous.
Donating assets to a DAF removes the growth of those assets from your estate.

TAX-LOSS HARVESTING

Now is a suitable time to review any unrealized gains and losses in your portfolio. Do you have short-term capital gains from earlier in the year? Since markets are down this year, it may be a good time to harvest losses from down positions in your portfolio’s taxable accounts to offset these gains. Harvesting losses can reduce the amount of income taxed at ordinary rates versus the preferred long-term capital gain rates. TMG utilizes tax loss harvesting in our clients' managed accounts, and we suggest checking for these opportunities in their non-managed accounts as well.

CLEAN VEHICLE CREDIT

Interested in purchasing a new car and helping the environment? The Inflation Reduction Act extends the Clean Vehicle Credit to certain electric and fuel cell vehicles purchased and delivered after August 16. More information from the IRS is available here.

Whether any of these strategies are right for you depends on a variety of factors including, but not limited to, your current year income, your charitable giving goals, types of accounts within your portfolio, and where your accounts are located.

TMG's financial planning team is available to discuss your unique circumstances. We also can run a complimentary retirement analysis—providing you a detailed overview of the comprehensive services our firm can offer that are designed to mitigate risk, optimize tax efficiency, and deliver tangible value to your bottom line. For more information, please contact us.

¹ IRS.gov, Qualified Charitable Distributions
² IRS.gov, Donor Advised Funds
³ IRS.gov, Charitable Contributions

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov, or on the firm’s website at www.themathergroup.com. The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, investment, or other professional advice.