7 Tips for Year-End Tax Planning

According to data from the IRS on individual income taxes in 2020, 157.5 million taxpayers earned $12.5 trillion in adjusted gross income and paid a total of $1.7 trillion in individual income taxes. To put that into perspective, for every $1 in income, that’s about $0.13 in taxes.

We can all agree that no one enjoys paying more taxes than they have to. To help with that, here's a list of 7 helpful tax planning tips to put your mind at ease.

1. Revisit Your Flexible Savings Account (FSA) and Health Savings Account (HSA)

   Make sure you use the funds in your FSA account before they go away. Your FSA money resets annually and any leftover funds will not roll over into the new year. Check with your Human Resources office for specific details on your company’s FSA plan.

   Revisit contribution rates for HSA and attempt to increase every year until you reach the plan limit (2021 Plan Limits — $3,600 for single, $7,200 for family, with an additional $1,000 allowed for catch-up contributions). HSAs are triple tax-advantaged, meaning the money going into the HSA isn’t taxed, and no taxes are owed on earnings, or withdrawals if it is spent on qualified medical expenses. Consult with your Human Resources office for more detail on your company’s specific HSA program.

2. Consider Charitable Donations

   Donating to a non-profit entity can help offset the amount you owe in taxes, including any funds you may receive from a Required Minimum Distribution.

3. Tax Loss Harvesting to Offset Gains

   This strategy involves selling investments that have lost value to help offset investments that have increased in value (“gains”). Accepting the loss on investments may help you manage the taxes owed on your investment gains.

4. Roth Conversions

   Roth conversions can be impactful when there is a gap between your taxable income and the next tax bracket. You can convert that difference into a Roth account. You will pay taxes on the amount converted, but you do not have to pay taxes when you withdraw from that Roth account. Subsequently, the funds in the Roth account can then grow tax-free. Please consult with a tax professional or financial advisor to review your specific situation.

5. Asset Location

   There are many different types of accounts, including taxable (like a checking or savings account) and tax-deferred accounts (like a 401(k)). To minimize taxes owed, you can hold your more tax-efficient assets (like tax-free bonds and exchange traded funds) in your taxable account(s) and your less tax-efficient assets (like real estate investment trusts and taxable bonds) in your tax-deferred account(s). As a result, this method can help minimize higher taxes over time. Consult with your financial advisor about specific asset location strategies for your situation.

6. Maximize retirement savings

   There may not be enough time this year to change how retirement savings can affect your taxes. Nonetheless, it is important to maximize your retirement savings throughout the year. In fact, the more income contributed each year to your retirement plan, the lower your taxable income becomes. Moreover, you can contribute money towards retirement on a pre-tax and after-tax basis.

7. Catch-up contributions

   If you are 50 years old or older, consider taking advantage of catch-up contributions through your 401(k), individual retirement account (IRA), and HSA (age 55 and older). It may be beneficial to adjust your contributions to contribute the maximum amount allowed, including catch-up contributions if you are eligible to do so.

Ensuring that your dollars are allocated in the most beneficial way is important when it comes to year-end tax planning. You could be unnecessarily missing significant tax advantages depending on how, where and how much you are currently investing. Given that each situation is unique, consulting with an expert on the tips above is a great way to optimize your position at tax time.

Want more info on tax planning? Watch the on-demand Financial Academy session,  Income Tax Strategies: Beyond the Basics

To ensure compliance with applicable Internal Revenue Service regulations, any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

The materials and the information are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. If you are seeking investment advice or recommendations, please contact your financial professional.

Investment advice offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.