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- [00:00]
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Foreign.
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What is up? And welcome back everyone to another episode of the Practical Planner podcast. I'm your host, Thomas Goldman, and here with me is Dave Haughton. Dave? So it's November. We're obviously recording this earlier, but we're pretending it's November for everybody else. And we're going to talk end of year tax planning. And so I think for advisors, you know, a lot of advisors don't really have a process. And I think one of my most practical tips for every advisor is you need to have a set process. You need to know, hey, I meet with clients this many times a year. We do this in Q1, we do this in Q2. And what I'm doing with all my clients at year end is end of year tax planning. So we're reviewing investments, we go between estate planning and insurances every other year and we do end of year tax planning. And, and so today's episode is going to be all about the different tax planning. We moves, moves we have at the end of the year. But tax planning moves is not as simple as make sure you max out your 401k. There's a lot more involved in that. And so we'll talk about that as we go. So when we think new end of your tax planning, you know, what are some, what's the first move that comes to your mind?
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Well, I mean, you know, thinking back to my days in advanced planning, me with advisors was just such a critical time period, I think certainly maximizing those deductions at the end of the year. And charitable giving certainly comes to mind. And because it's a time when we'd see really urgent gifts to donor advised funds that would come up where people are trying to maximize their charitable giving, they're trying to avoid those capital gains, and they're doing the giving right at the end of the year. One of the things that I used to very commonly see, however, is people really taking it to the end of the line and really procrastinating and getting to the point almost that administratively, operationally, you're toeing the line of whether it could even get processed. So I think it's important that you give yourself enough leeway to not be doing this the last day of the year, whatever you're trying to get out for deduction purposes.
- [02:15]
B
Yeah, I think that's, that's a really good one. So charitable giving, donor advised fund. Understand custodians are really busy at the end of the year. So you're not trying to do this on December 28th, right? There's a lot of time it's closed down. There's a lot of time where there's just not a lot of people working. And that goes hand in hand with kind of end of year Roth conversions as well. We'll just stick on there. So a lot of times people are doing Roth conversions and they're also doing charitable giving to kind of help offset it. But by the end of the year, you should know where expected income is going to be, what room you have for Roth conversions and execute on those Roth conversions. And you know, that's good year end tax planning. The next one that I would bring up here is just honestly do a new tax projection. So you can't do end of your tax planning without knowing where they're at. I've. I've actually seen a bunch of posts from financial advisors in the last bit that were really like, oh, I've had some huge issues where I told a client to do a Roth conversion and then I realized that they had other income I didn't know about. Right. Well, that's really on you. You should be digging into the income sources. If you're not looking at last year's tax return to understand all their income sources and you're not looking at updated pay stubs, investment statements, business financials, etc. You should definitely not be advising anybody to do Roth conversions because you're just saying, hey client, you guessed 200k income. I'm going to take the standard deduction. Here's your room left. That's really terrible tax planning and that's a way that you're going to get yourself in trouble really quick as an advisor. So look at where they're at, update a projection. You know, a lot of times for our business owner clients, they either, you know, we're targeting 90% safe harbor, maybe they don't need to make a Q4 payment or maybe they ended up making more and that Q4 payment needs to go up. And then also give them updated projections of what they're going to owe next April as well. So they can plan well for it, not go use that money that they need for taxes.
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Yeah, absolutely. Okay, great points.
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B
Okay, next one that comes to mind for you.
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A
Well, I think gifting, you know, coming from an estate planning perspective, especially when it goes to kids529 or just gifting in general, if you're trying to get assets out of the estate and do your annual gifting, remember you only have a $19,000 per year limit right now to be able to gift without needing to File a tax gift tax return. And depending on whether you're splitting gifts with your spouse and things of that nature, that's per calendar year. So really important, you know, let's say you want to give a $50,000 gift to a child to help them with a down payment on a home. Remembering that it's per calendar year is important. And this comes up for anything that's per calendar year. Just remember, you can always do a half in December and half in January and you can cross the tax years and that way you can stay under those thresholds without needing extra tax filings.
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Yep, that. That's a really good one. Next one I would go to is just like check in on qualified plans. So 401k, 403b, 457. This could be mega backdoor Roth. Go through all of those and see where you're at. A lot of times our clients, the goal is to max it out, but they have their percentage too low or they've already maxed out and we can funnel more into the mega backdoor Roth. So the goal isn't always for everybody to max out. For my clients just because they're so high income, like this is, you know, such a low part of their investments per year, we're making sure everything gets maxed out from 401k to mega backdoor. If it's an option, this could be making sure HSA gets done, you know, all of those different areas. Make sure they're funding the right amount that they want to get done. Because I'll see all the time, like the money spouse does it, the non money spouse, like forgotten. They're only doing 6% and they still have like 15k of room they that we want to make sure that they use.
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Absolutely.
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Okay, next one.
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Yeah. And this probably comes a lot from your realm, but tax loss harvesting, I mean, I think it's critical. We've seen where the tax law is now with the big beautiful bill. We know where the tax rates are. And it's really critical to be very intentional and understand exactly where your AGI is at and how you can mitigate that tax bill. We talked about charitable giving, but also through tax loss harvesting at the end of the year and to make sure again that you're giving yourself enough time to be able to get that done. The other thing to look out for is wash sales. I think that probably happens a lot at the end of the year. So to make sure that you understand those wash sale rules and you make sure it's not a substantially similar Security that you're going to buy back.
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Yeah, that's a good one. I'm a big believer that tax loss harvest when it's available and then accelerate a year end, especially with short term losses. So I think that's a really good one. And I think the other one that goes hand in hand is tax gain harvesting. So like I've had a couple of clients who are having like a sabbatical year or they just retired. And so you have this ability to potentially tax gain harvest either one by using losses or two, using potentially a 0% capital gains bracket. And so it's a really good time of the year to think about that. You know, another one that I would think about is just like making sure you use your dependent care FSA funds or your FSA funds. You know, things that are going to be use it or lose it. You know, good tax planning is don't waste the money, make sure you get that spent on different areas. This is why we see people have surgeries and buy glasses or do all these things at year end is because they're trying to spend that money. Another one that I think is important to think about is potentially using your AMT threshold. So we have a lot of clients who you don't really know where they're going to end up income wise, year ends. A really good time to say, okay, I have these ISOs. I have the ability to exercise, you know, let's say 30,000 of spread without triggering AMT. Well, let's for sure get that done this year because if you wait till next year, you're not going to be able to get that much, only that 30k again. Right. So for a lot of people with a lot of positions, that's something to think about. You know, another one to think about is exercising NSOs. Maybe you realize you have room in the 24% bracket before going to 32. Okay, let's exercise some of your NSOs or hey, that's going to create more room to exercise ISOs without triggering AMT. So I think that's a good one you could think about at year end potentially, hey, I bought a property this year. I should do a cost segregation study and bonus depreciate the property. You know, earlier in episodes we talked about the new tax bill and the benefits of 100% bonus depreciation. And then there's all the business owner side of things. I think that's a lot of the, you know, I think the only other one I can think of is like get 529 plan contributions in a year ends like Indiana, we get a $1500 tax credit. If you put in 7500 other states, it's a deduction. So make sure you kind of hit that at year end. But then if we flip into this business owner side of things, you know, again, that's maxing your 401k. It could be getting your solo for a 1k employee side contribution done. You know, this isn't a year end thing. You have till tax filing deadline. But we have Roth IRAs, backdoor Roth get those funded. You know, we talk about maximizing the qualified business income deduction. So that's what we do a lot at year end is saying, hey, you know, an S corp, we need to run a salary payment. Let's max out QBID to get profits and salaries to basically get that max deduction. So I think that's a good one. You could potentially early pay a PTAT payment to get the deduction in this year. If it's going to be a high income earning year, you could defer or accelerate income. You could accelerate certain expenses if you want to. Okay, I just rattled off a lot.
- [09:56]
A
I think you made a good point in there too that you know, some of these rules are calendar years and some of them are tax filing deadlines. And then another one that comes to mind, especially in the world of estate planning, are trust distributions. Now remember, if you have income in a trust and the year turns over and you haven't distributed it out, what can be distributed out, whether the trust calls for income distributions or their discretionary distributions, then you're going to be paying taxes at the really unfavorable trust in the states tax rates. If you can get that income out, a lot of people like to, and then they can K1, the beneficiary and the beneficiary will be liable for those income taxes. That's something that is done at the end of the year a lot of times because they like to see how the trust perform. With a trust income tax situation is they don't necessarily have to do it by December 31st though they do have the 65 day rule where you can go into the next year and you can get some of that distributable net income out the next year. But it's something definitely to think about your K1 strategy with your trust to make sure that they're not going to be paying really unfavorable rates.
- [11:06]
B
That is a good one. That's a really good one. Okay. Another one that comes to mind for Me is like, again, for the business owners. A lot of S Corp owners, for example, are doing bonus payments at year end. Right. We talked about maximizing qbid. A lot of this also is fine tuning withholding. So do we need to increase withholding to get a certain amount for state or Fed to hit safe harbor numbers? I think that's a really good one. What other ones come to mind here? I had another one, but now I can't think about it.
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I mean, I think, you know, in the same realm of charitable. Charitable giving, we talked about just making charitable gifts. But QCDs.
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Oh, good one.
- [11:46]
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Certainly another one. You know, qualified charitable distributions. To the extent that people haven't satisfied their RMD already, they can satisfy their RMD with a qcd. A lot of people may do that early in the year, but they can do it before year end and that can make their RMD tax free up to $100,000. So it's a really powerful tool.
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B
That. That's a really good one. Another one that comes to mind for me is evaluating entity election. So like, you have a lot of people who maybe started a side business and didn't think it was going to do as well as it did and now it blew up. Right now we need to think S Corp or hey, now, you know, partnership makes sense because it's getting big enough that we want to get PTE ability. Or that way you can get your spouse involved and now have a solo 401k available for them. Or hey, you know, you started this business and realize you're building a piece of tech and now moving January 1st to C Corp could potentially be advantageous. So like reevaluating things so for the start of next year, you're in the right structure, I think is also a really important move to make.
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A
Absolutely, man.
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B
I think that's like everything that was on my list for end of year tax planning. Is there anything on yours that.
- [12:53]
A
No, I think we went through the laundry list.
- [12:55]
B
Yeah, I think that's like a pretty. We went. I mean, like, at the end of the day, like, this is like more of a checklist. Like, I think as an advisor, you should know, Hey, I, I work with retirees. Here's the checklist of tax planning that we do. You know, I think one thing you could look at is, okay, hey, you had a ton of interest this year. Okay, well, why do we have so much interest? Well, hey, maybe our asset location is wrong. We have way too much bonds and way too much cash in our name. Or maybe we're. We're realizing we have so many non qualified dividends, why aren't we putting REITs and some of the other things in non qualified accounts? So I think there's just like this, know your niche, what are the things that apply to them? Right. I talked about ISOs and NSOs and AMT and stuff. Right. That's really good for your equity comp people. Then we know what to do for our business owners and you know what to do with your retirees. Really build that checklist so you and your team can be efficient to look at the tax planning moves for everybody. But again, I think, you know, the number one thing people look for in their advisor is tax planning. So build it into your process. It should be done at the end of the year, probably also early in the year, mid year kind of planning for the year and then wrap it up at year end. But I think this is a really good way to win in the eyes of your clients.
- [14:00]
A
Absolutely. And I think, you know, the other thing is sometimes you're doing the planning at the end of the year because you want to have a picture of what happened earlier in the year. And sometimes it's just procrastination. And if it's just procrastination, you want to be careful of that and identify what you could do earlier in the year. Because remember, you know, like Thomas, like you said earlier, the custodians are very busy at the end of the year. Clients are going on vacation, staff are going on vacation. So to the extent that it doesn't need to be a crunch with your hair on fire to get these things done right at the nick of time before midnight on December 31, it's better if you can do it earlier in the year to the extent that you don't necessarily need to see the full picture first.
- [14:45]
B
Yep, yep. Really good points. Okay, well, I think that's everything that we wanted to go through today. So everybody, thanks for listening again. Please don't forget to rate and subscribe. Subscribe and you know, happy tax planning.