Tax Planning CI BDF Private Wealth Business Owners

5 Quick tax planning strategies before year-end

As the end of the year approaches, implementing one or more of the following strategies could help save on taxes:

1. Roth conversion to fill up 24% tax bracket

The 2017 Tax Cuts and Jobs Act lowered tax rates on a temporary basis – rates are set to return to the higher levels starting in 2026.1 While the lower rates are still around, it could be beneficial to fill up the 24% tax bracket (income up to $164,925 for single filers and $329,850 for married filers) with a Roth conversion. A married couple with this same level of income would have been well into the 33% bracket under the old law!

2. Back door Roth IRA

Many individuals would love to be able to contribute to a Roth IRA but have too much income to do so. These taxpayers can still make a Traditional IRA contribution, but due to their high income, it is likely non-deductible. As long as the taxpayer has no other Traditional IRA assets, this non-deductible IRA contribution can be converted to Roth with little or no tax due.2 This can be a great way for higher-income taxpayers to build up tax-free Roth IRA assets.

3. Qualified charitable distribution

Since required minimum distributions returned for the 2021 tax year, qualified charitable distributions are back in focus. A taxpayer who is age 70 ½ or older can give up to $100,000 from their retirement account directly to a qualified 501(c)(3) charitable organization. If a taxpayer is subject to required minimum distributions, this qualified charitable distribution can go toward satisfying the required distribution amount. We think this is a great planning idea for charitably-inclined taxpayers – they can satisfy a required minimum distribution, keep ordinary income off their return, and help their favorite charity in the process.

4. Alternate years for charitable giving

For the 2022 tax year, a married couple filing jointly will receive a standard deduction of $25,900. Itemized deductions such as state taxes paid, mortgage interest, and charitable deductions may get some taxpayers just over the bar of this standard deduction. One planning idea is to bunch two years’ worth of charitable gifts into one year to get further over the standard deduction that year. Then, the next year, no charitable giving is done, and the standard deduction is taken. This should result in increased Schedule A Itemized Deductions over time, which will save on taxes.

5. Contribute to 529 plans

Many states provide tax deductions for contributions to their 529 plan. For example, Illinois offers a state tax deduction of up to $10,000 for single filers and $20,000 for married filers, saving approximately $500 and $1,000 of Illinois tax, respectively. We think 529 plans are great accounts, as they are triple tax-advantaged – contributions into the account are tax-deductible, the assets in the account grow tax-deferred, and as long as the assets are used for qualified education expenses, distributions are tax-free. Check the rules in your state and consider making a contribution.

It’s always important to speak with your wealth advisor or tax professional about what is best for your particular situation, but implementing one or more of these strategies before year-end could result in tax savings this year and into the future.


ABOUT THE AUTHOR

Matt Foltz, CPA, CFP, CEPA, MS in Accountancy

Matt Foltz, CPA, CFP, CEPA, MS in Accountancy

Wealth Advisor

Matt sits on BDF's Financial Planning Committee and leads many of the firm's tax-related initiatives. He has a passion for building strong relationships with his clients and helping them make sound decisions. Matt also holds the Certified Exit Planning Advisor designation which helps him advise business owners on how to exit their business and prepare for retirement.




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