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Tax Planning for Individuals

Tax Planning

One of the most important times of the year to save on your taxes is right before the end of the year. This is when “The Rich” gets together with their CPAs and financial advisors to figure out the best way to save money. The Rich looks at taxes as an expense that you never want to pay. They’re proactive with their tax planning and always talk to their CPAs in December to minimize their tax expense. Remember, once the year is over, it’s possibly too late. We are going to show you a few common year-end tax planning strategies, so you don’t miss out.

What is Tax Planning?

It’s when you go over your current year finances so you can make strategic decisions to pay the least amount of tax legally possible. This is usually done with a financial advisor (CPA, Tax Attorney, Wealth Manager, etc.,) but doesn’t have to be. Tax planning takes on different forms. The two most common are:

  • Individual tax planning
  • Business tax planning

In this article we are going to go over tax planning for individuals. In our next article, we will cover business tax planning.

6 Strategies for Year-End Tax Planning

We are going to show you six strategies you can use before the end of the year. These are for individual taxpayers that don’t own a business and only file an individual tax return (Form 1040). However, if you own a business that’s a flow-thru entity or is reported on your personal return (Single Member LLC, S-Corporation, member of a partnership, etc.), you can use these too.

1. Charitable Deductions

If you itemize on your tax return, you may be interested in donating to charity to get a bigger deduction. You can donate cash, clothing, stock, or vehicles, to help you, but the rules are complicated. I don’t want you make any mistakes, so I wrote an article on donating to charity, here’s a link.

2. Fund Your Retirement

If you haven’t maxed out your Traditional IRA or employer sponsored retirement plan yet, you still have time. For every dollar you fund your pre-tax retirement plan, you don’t have to pay tax until you retire.  If your job has a retirement plan offered, consider increasing your contribution before year-end. Also, some employers offer matching contribution (i.e. free money) if you fund your retirement through work. So definitely talk to your boss or the HR department about this.

Whether you have a 401(k), Simple IRA, or Traditional IRA, the maximum amount you can fund is different, so check with your work.

3. Stock Loss Harvesting

Let’s face it, you’re not Warren Buffett (and even if you were), you may have some “lemons” in your stock portfolio. If that’s the case, you may consider selling those “lemons” (stock that’s losing money) at a loss to offset your other stock gains. One thing to remember is the net amount of stock losses you can take in one year is $3,000, but you off set all your losses against all your gains. Here’s an example:

You have $6,000 in capital gains you have to pay tax on for stock you sold in June of 2021. In your stock portfolio, you have a lemon that’s a $5,000 loss, but you haven’t sold it yet (i.e. you’re still holding the stock). If you sell the stock at a loss, you will only pay tax on $1,000 ($6,000 stock gain minus a $5,000 stock loss). Now, let’s see what happens if the loss is bigger?

Second example: let’s assume that instead of your lemon being a $4,000 loss, it’s a $15,000 loss. If you decide to sell that stock, your net loss is now <$9,000> ($6,000 stock gain minus a $15,000 stock loss).  You will only get to deduct $3,000 this year, the other $6,000 of stock losses will be carried forward to the next tax year (2022).

So keep in mind that any stock losses over $3,000 aren’t deductible until the following year.

4. Roth IRA Conversions

First things first: what’s the difference between a Traditional IRA and a Roth IRA? There’s a lot to know about IRAs, so we wrote an entire article on it here. For now what you need to know is that a Traditional IRA is deducible when you make the contribution, and a Roth is tax free when you pull the money out. Here’s a chart to help you understand it better:

Type of IRADeduction or NotWhat’s Taxed
Traditional IRADeduction when you contributePay tax when you take money out
Roth IRANo deduction when you contributeNo tax when you take money out
*Note: there may be limits on your deduction, please check with your CPA or read our article on Traditional IRAs

Here’s the strategy: let’s say you are in a very low tax bracket. If you have money sitting in a Traditional IRA, this would be a great time to convert it to a Roth. That way you pay the tax at a very low tax rate. Here’s how it works.

If you convert your traditional IRA to a Roth IRA, you must pay tax on the conversion. That’s because you get a deduction for traditional IRA contributions, and pay tax on the growth, but get no deduction for Roth IRA contributions, and pay no tax on the growth. Here’s an example:

Say you’re 29 years old with $5,000 in your Traditional IRA. You are expecting to retire at 70, and believe your $5,000 will grow to $80,000. Due to COVID in 2021, you had bad year for income so your tax rate is only 10%. You decide to covert the $5,000 from a Traditional IRA to a Roth IRA. You’ll owe an additional tax of $500 when you file your 2021 tax return. But guess what? You will owe no tax on the $80,000 growth when you pull the money out during retirement because it’s sitting in a Roth IRA.

This is a very complicated transaction, and you shouldn’t take it lightly. Definitely talk to your CPA or financial advisor so they can run your numbers to make sure this strategy makes sense for you.

5. Backdoor Roth IRAs

The Rich love to contribute to Roth IRAs. That’s because there’s no tax on the growth. However, if you make too much money, you’re not allowed to directly fund a Roth IRA. But guess what? There’s another way to get money into your Roth IRA, that’s with a Backdoor Roth IRA.

A Backdoor Roth IRA (also called a Backdoor Roth) allows you to fund a Roth IRA indirectly. There are two steps to a Backdoor Roth:

  • First fund a Traditional IRA
  • Then transfer the money from the Traditional IRA to your Roth IRA directly as a fund-to-fund transfer

Just like Roth IRA conversions, these are very technical and I recommend you talk to your CPA or financial advisor before attempting to do one.

Another thing to be aware of is, there’s been a lot of talk in Congress about eliminating the Backdoor Roth IRA. If you are one of those taxpayers that normally does a Backdoor Roth, we suggest doing it before the end of the year, and not wait. There is no telling what Congress will do.

6. Annual Gift Tax Exemption

The annual gift tax exemption is $17,000. So, if you were thinking of giving your kids (or heirs, friends, family, etc.) any gifts without tax consequences, consider making the gift before the end of the year so both of you can avoid tax. The gift can be $17,000 per parent, so a married couple could give up to $34,000 to each of their children an avoid tax. If you’re a parent, think about giving to your kids. If you’re a kid, think about hitting up your folks.

Tax YearTax Year 2023Tax Year 2024
Annual Gift Tax Exemption$17,000$18,000


Remember, “The Rich” looks at taxes as an expense that you never want to pay. We all know that taxes need to be paid, but it’s up to us to find strategies that lower our taxes as much as legally possible. And please, talk to your CPA or financial advisor before taking any action. Here’s a link to our article on Tax Planning Strategies for Businesses.