Leveraging Tax-Savings Opportunities with the Help of an Advisor

Whether it be in our personal lives, national affairs or world events, the only constant is continuous change. The same can be said in politics, legislation and taxes.

For the majority of 2021, we analyzed the potential impact of President Biden’s economic legislation while bracing for the proposed tax increases. While the Build Back Better Act did not come to fruition in December 2021, Congress could potentially pass an iteration of the bill in 2022. Compounding this reality is the upcoming sunset of the 2017 Tax Cuts and Jobs Act (TCJA) which will likely create additional tax burden for individuals beginning in 2026. Unless some or all of the TCJA provisions are extended, the terms that doubled the individual gift and estate tax exemption and reduced individual income rates will revert to pre-2018 levels after 2025.

In the whirlwind of change, you may be hearing or reading conflicting information from many different sources. With 2021 tax preparation in the rearview mirror, now is a great opportunity to coordinate with a fiduciary advisor to review your plans to ensure you’re maximizing tax-savings opportunities.

Here are four ideas to consider:

1. Start Roth Conversion Conversations Now

President Joe Biden’s Build Back Better legislation proposed placing limits on Roth conversions for high earners which would have prohibited so-called back-door Roth conversions for all income levels. Since the legislation did not come to pass in 2021, we’re encouraging individuals to evaluate if it makes sense to move funds from a traditional IRA to a Roth IRA account. This strategy is particularly advantageous in light of the 2019 SECURE Act legislation that eliminated the stretch IRA strategy for those who plan to leave assets in a tax-deferred retirement account for their heirs. Now more than ever it may be beneficial to transition traditional IRA assets to a Roth account where earnings will grow tax-free for future beneficiaries.

2. Reconsider Your Stock Gifting Strategy

In 2022, the annual federal gift tax exclusion amount increased to $16,000 per person. As market volatility persists and equity prices tumble from previous highs, it may be beneficial to complete stock gifting earlier in the year versus starting the conversation in the fourth quarter. By accelerating a thoughtful stock gifting strategy at lower valuations, you’ll remove the future growth of these assets from your estate. For individuals who choose to endow more than the annual gift tax exclusion, proper planning and tax documentation are necessary to ensure you’re taking full advantage of the current estate tax exemption. In 2022, the exemption is hovering at $12 million per person; however, in 2026 it will return to inflation adjusted levels of $5 million per person.

3. Optimize Tax Loss Harvesting Opportunities

To maximize after-tax returns, it’s important to actively manage taxes throughout the course of the year. One effective way to do so is tax loss harvesting. With this strategy, an individual sells a taxable account investment that’s declined in value to capture the losses to offset realized capital gains. In addition, if your realized losses are larger than your realized gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income. Any amount over $3,000 can be carried forward to future tax years to offset income in the future. For many individuals, tax loss harvesting is a year-end strategy. From a calendar planning perspective, this approach might be easier; however, you might be missing out on attractive opportunities throughout the balance of the year.

4. Leverage Qualified Charitable Distributions

For charitably inclined individuals who are 70 ½ or older, we encourage making contributions directly from a traditional IRA account. This strategy is called a qualified charitable distribution (QCD). It can satisfy your required minimum distribution (RMD) for the calendar year and ultimately reduce your taxes. For a charitable distribution to qualify as a QCD, the distribution must be made directly from a traditional IRA account to a public charity. When a QCD is made, the distribution isn’t included in your gross income; however, it’s important to properly report the QCD on your tax return. When a distribution is made from a retirement account, individuals will receive a Form 1099-R that shows the total amount of distributions during the year. Notably, Form 1099-R will not distinguish between QCDs and other distributions.

Considering the fluid legislative environment, developing and implementing a thoughtful tax-savings strategy can be cumbersome. When leveraging tax savings opportunities, partnering with a financial advisor is extremely beneficial. At Buckingham Strategic Wealth, we welcome the opportunity to discuss your specific circumstances. For more information, please visit our website or connect with us for a short introductory conversation.

About the author

Amanda Merrill, JD, CFP® – Client Development Advisor/Buckingham Strategic Partners

Amanda entered the wealth management field because of a strong desire to help people and empower them with clarity and confidence around their financial lives. The most rewarding part of her day is getting to know prospective clients and their unique stories. She loves to hear about where they’ve been, what’s important to them, and where they want to go. Amanda implements and manages client development, helps drive organic growth and leads ongoing coaching for Buckingham Strategic Wealth’s diverse advisory teams. She also collaborates with strategic partners to educate clients on the value of Buckingham’s holistic approach to financial planning.

For informational and educational purposes only. Certain information is based upon third party data which may become outdated or otherwise superseded without notice.  Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.  Some information is based on proposed tax law changes and may or may not be put into law therefore the above strategies should be carefully discussed with an advisor prior to implementing them in a portfolio. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-22-3640