7 Key Strategies for Year-End Tax Planning

Conversation with: Sean Bailey, Editor-in-Chief of Horsesmouth & Debra Taylor, CPA/PFS, JD, CDFA   (WATCH VIDEO)


Sean Bailey: Hi everyone. Welcome back to the Savvy Tax Planning Monthly Video blog. I’m Sean Bailey, editor in chief and Horsesmouth. I’m here with the amazing Debbie Taylor, co-creator of our Savvy Tax Planning program. Debbie, great to see you again. It’s October and we’re in the final quarter of the year, and it always makes sense for advisors to loop back to their clients in the final quarter of the year. There could be many open items from earlier in the year, but also it can be a fresh opportunity to engage clients around a variety of issues like Horsesmouth’s, Last-Chance Financial Planning Checklist dives into all sorts of things that generate valuable interactions between advisors and their clients in that last quarter of the year. But we’re going to be talking today about year-end tax planning tips. So, Debbie, it is the start of the fourth quarter. Let’s see how many of these tips we can get through today. You’ve got seven and your first one is, well, why don’t you tell us you read them off.

1. Review tax returns

Debra Taylor: I mean, the first one is we have to review tax returns. So, remember that the final extension deadline, final, final, final, they don’t care if your dog ate your homework is October 15th, and so now is the time all these clients who’ve been putting you off, Hey, I’m on extension. Oh, don’t worry about it. Whatever right now is the time. No more excuses you should be getting, and you should have all of your client’s tax returns. So, I’m going to stop there, see if you have any questions or I’ll continue.

Sean Bailey: What percentage of your client base tends to be chronically chronic extenders for really frankly totally legitimate reasons, right?

Debra Taylor: I would tell you maybe it’s 50% more and more. This is how the world is running. We don’t have enough accountants out there. I mean that’s documented actually. People are not going into the industry and tax preparation has become an absolute nightmare because in the old days, if you remember at the end of January is when you could get those 1099s. And so, we would have people making appointments for the last week of January to come in and get their taxes done. Now, fast forward 30 years, we send out an email to our clients during tax season telling them that we do not want them finalizing their tax return until the middle of March because that is the last correction cycle for the 1099s from our custodian, TD and Charles Schwab. So now folks are not finalizing their tax returns until the middle of March and tax season ends in the middle of April. I mean, that doesn’t allow a lot of time. And so, you see more and more people. In the old days it was entrepreneurs, real estate owners, partnerships, you’re waiting for, and now more and more accountants are like, yeah, I just can’t get to this and you’re going on extension.

Sean Bailey: And so, when we’re talking about reviewing the client’s tax returns, some of the items that you’re looking at there are not just like what they ended up paying in taxes this year versus last year. There are some other issues to consider as well, right?

Debra Taylor: And so, we wrote an article on that on August 14th in anticipation of, yeah, hey, we’re going to start getting these tax returns now and then everybody should have a system as far as reviewing them, and in the past, we would view them manually. Now we use Holistiplan, and we’ve talked plenty about that and again, wrote several articles about that. But looking at it, identifying any tax planning opportunities and sort of just positioning yourself for Roth conversions, distribution planning, Hey, it’s somebody in the lowest tax bracket, 10% or 12%. Should we be pulling some of that income forward and taking advantage of those low tax brackets? Oh, here’s someone with a big carry forward loss and they also have a big apple position. Should we maybe be capital gain harvesting and selling some of that apple and essentially resetting that basis and having the loss offset those gains. So, there’s a lot of fun stuff that you can do, but it all begins with getting the tax return and really knowing your way around that tax return.

Sean Bailey: So, your second tip, I think you kind of pulled the trigger on that one. You said consider tax loss and trading, tax loss trading and capital gain harvesting. So, is there more to say about that or is that kind of what you were just getting at just now?

2. Consider your tax loss trading and capital gain harvesting

Debra Taylor: Yeah, so I mean just a couple things really quick on that. We want to look at carry forward losses and make good use of that. Also remember with your carry forward losses, and this is just a side note, is we don’t necessarily want the older person in the relationship to have those carry forward losses because they die with the person. And so, this is sort of advanced planning, but if you’ve got that big carry forward loss, you want to make sure that it’s with the younger healthier spouse, you don’t want those losses dying and then going away, but we want to look at those carry forward losses and see how we want to leverage them. We want to look at those low tax bracket people and take advantage of those 10%, 12% years or maybe those 22%, 24% years if it’s someone who normally would be in the 35 or 37% tax bracket.

So, everything is relative. Don’t just come with this hard and fast rule and then you want to look at it, I had another point on this. The other thing you want to look at, because this year has generally been a pretty good year for the market, even though in the last month or so we’ve given back some gains, but if you look at your clients, most of them are going to be up. Even if they’re not up as much as they were a month ago, they’re going to be up. So, if you’re just doing a superficial analysis, you’re going to say, “Well, Debbie, I don’t have tax loss trading because the market’s up, but that is not what we should be looking at.” So, you can look at the clients and in a year like this, most of them are going to be up.

Then you want to go deeper though. You want to look at, let’s say a client has a TOD account and an individual account and a joint account. So, three taxable accounts, you could look at those three taxable accounts and maybe all three of them are also positive. Well diversified, there’s some technology, but you don’t want to stop there because if you go within the account, let’s just take the TOD account. If you go within the TOD account, the TOD account could be positive. It has some Apple position or technology, whatever, but it could also have embedded in that account losses from other positions. But Apple just gained so much that it’s masking losses within that TOD account. So, what you really need to do if you’re doing tax loss trading is you really need to dig, dig and get really granular and not stop at, oh, this client is up, not stop at, oh, well they have five accounts with us and those five taxable accounts are up. You got to look within each account to see where those opportunities are to do that tax loss trading.

Sean Bailey: Right. And is there something in your tech stack that helps with that?

Debra Taylor: That is a great question, Sean. Not yet. There’s that direct indexing that you’re hearing so much about and basically the direct indexing automates that process, which is why direct indexing is gaining a lot of that popularity, particularly from last year when the market was down so much. But you see Goldman E in Vance Para metrics is you see a lot of them are rolling out direct indexing again to automate that and take some of that burden off of our shoulders.

Sean Bailey: Right, and I just have one other question. You were talking before about a couple that’s on in the ears, one’s frailer than the other, who’s carrying the carry forward loss there? Is there a way to swap that around? If it’s in an account that’s held by spouse, how do you move or that over to spouse two?

Debra Taylor: Remember that spouses have an unlimited gift exemption for each other. So, if I wanted to today, I could take everything that’s in my name and transfer it over to my husband, no problem. Obviously, IRAs, you can’t do that. A retirement account, they have to stay in your name, but taxable accounts, TOD joint accounts, I could transfer that all over to Rob tomorrow if I wanted without any tax implications and vice versa.

Sean Bailey: Interesting, interesting. I didn’t know that. Okay, shall we move on to number three?

3. Maximizing your client’s retirement account contributions

Debra Taylor: Sure. So again, a lot of what we’re covering here is sort of the tried and true, but the idea here is to sort of organize this and create these reminders for our listeners. And so, one of these is maximizing these client retirement account contributions and you’re sort of rolling your eyes. Yeah, I know that, but it’s sort of interesting when you look at this, first of all, it’s $22,500 for our retirement account, then it’s $7,500 if you’re 50 and over, so that’s $30,000 for that client that is 50 and over. So, for now, a married couple, let’s say like me and my husband, that is $60,000 that can go into those retirement accounts. That’s a lot of money and it turns out to be like $5,000 a month. So, it’s something you want to keep your eye on because some folks are going to shy away from that early in the year when they set up their allocations, they’re like, oh my gosh, $5,000 a month, that’s a big number.

I got Susie going to college. I got this thing going on. And so now you might come into the middle or end of the year and maybe they do have extra money and maybe they can get to that $60,000 number and you remember they can reach out to HR payroll and accelerate those contributions between now and the end of the year to get to that $60,000. If you do that, you want to also make sure your client on January 1st reviews their pay stub because we’ve seen that at times we accelerate, we say, okay, put an extra $3,000 in for the last two months or something to get to the 60, and then HR doesn’t change it back, and so you need to make sure that you tell HR to change it back, but trust but verify is that first week or 2nd of January, you want to double check that pay stub or double check with payroll or go online and make sure it goes back to whatever allocation makes sense for 2024.

So, you just want to keep an eye on this and sort of nudge your clients a little bit to be as aggressive as they can in this area because clients will have a tendency to hold back and not want to commit. The other thing you need to remember, aside from IRA contributions, which yes, I know we have until April, but we do know over a period of 20 or 30 years, frontloading those contributions actually creates more wealth. So, it’s not a bad thing to try to get those contributions in before April. Now you’re basically waiting a year and four months to do contributions, right? Because technically 2023 contributions could have been going in January of 2023. I’m not saying they have to all go in January, but waiting until April of 2024 is probably not best practice. So, you want to nudge in that way as well.

Remember, we’ve got $7,500 when you include the catchup for that. But then the other thing that’s really critical for your clients that are working at those large firms, like those large biotech firms and large technology firms is remember those after-tax contributions and those after-tax contributions can be $43,500 that go in after tax, and then you can roll them into a Roth. And a lot of advisors forget about that, don’t know about it or don’t really understand how that works because it doesn’t apply to all their clients and they’re not reading about it every day. So, at the end of the day, when you take a step back, your client has $66,000 that can go into a deferred compensation plan, $66,000 of employer and employee contributions. When you factor in the 401(k) and you factor in after tax, it is $66,000 and that doesn’t include the catch up of $7,500. So, this is big money for your clients that are in corporate settings, those higher paid clients, you want to ask for their benefit statements, which are all coming out around now and November, and if they have access to these after-tax accounts, you want to set those up for these clients as well. Right?

Sean Bailey: Good. Okay. Shall we move on? We’ve done three so far. Shall we move on or what is your thought?

4. Roth conversions

Debra Taylor: Let’s keep going. So, my favorite, the fourth is Roth conversions, and this is the drum that we have been beating since 2008 and 2009 would, if you remember back then you could do the conversion and pay the tax over two years. And so, this is the hallmark of some of this great distribution planning. Sometimes you sound like a one trick pony is I’ll have clients say to me or sometimes prospects that are very skeptical and they’re like, “Oh, you seem to be talking about Roth conversions a lot.” Look, I have a lot of tools in my toolkit, but you can’t blame me for wanting to keep going back to the tool that is most effective, most widely available and most impactful in so many ways. And so now is the time, it’s October, you should be setting up your Roth conversion work all year. Don’t get me wrong, we’ve been setting it up, but now is the time, right?

I mean you have less than 90 days to put these recommendations together, getting them in front of the clients, having that negotiation because when you show up and you’re like, yes, you need to convert $200,000, they’re like, oh yes, no problem. Here’s the check. It is a negotiation. So, you need to start it now because it is a multi-step process and you’ve got to get those trades in there because remember, come December the custodians are doing these trades on a best-efforts basis and over at TD and Schwab, who knows what’s going on. So, you really want to start this Roth conversion work now.

Sean Bailey: Right? Good. Okay. On to number five.

5. RMDs and QCDs

Debra Taylor: Alright, RMDs and QCDs, it has been 25 years. We’ve never missed an RMD. I’m sort of obsessed with this. So, remember, our QCDs ideally are done earlier in the year, and we’ve talked about that Sean in earlier podcasts in January, February. Ideally QCDs come first. That way when the QCD comes out, it can offset whatever RMD amount there is. But having said that, anyone over 70 and a half is qualified to do the QCD and the QCD still can make sense even if the RMD was already taken because at the very least the QCD will decrease the traditional IRA balance, which is always a good thing, but ideally QCD is first. Alright? So that’s that part of it. The other part though is again, calendar year, we’re very calendar year oriented.

These RMDs must be pulled out by December 31st. So here our practice is yes, sometimes people take it monthly, but sometimes people do once a year. If it’s once a year, we do it in October, we do all the analysis, all the review we do in October, we’re not going to wait till the last minute and try to get this work done, send forms out to clients, they’re distracted, it’s the holidays, whatever. So, October is our time to button this up really well. Also remember inherited IRAs, those folks still have to take RMDs, pre-Secure Act and also post Secure Act under certain circumstances. And so, we’ve got to really be thorough. And also remember sometimes the custodians don’t address this area very thoughtfully because they don’t want liability. So sometimes custodians don’t talk about the inherited IRAs and the RMDs that are due because they don’t want the liability, so they step away. You need to step in.

Sean Bailey: Okay, good. Like the sound of that one. Alright, let’s move on to number six.

6. Financial Contingency Plan

Debra Taylor: So, number six is sort of tax related but sort of not. So, I threw it in here is this financial contingency plan and basically six and seven, they sort of revolve around rising interest rates and I included them in here because are they strictly tax oriented? No, not so much. But if we’re doing this year-end work for clients, we need to think how is this year different than previous years? And this year is different than previous years for the last, honestly, decade or two because inflation is high and interest rates are high and that is then affecting everything. And so, I did include this here as part of our year end planning is we want a contingency plan for our clients. We basically want a plan B where they have access to liquidity. Also, you want to review their sources of liquidity, you want to review their debt, right?

Their home equity line, their credit cards, their mortgages, and even their collateral based loans that they might’ve gotten through you. So, a year ago, all these things sounded like great ideas because the interest rates were 2%, 3%, three and a half percent. So why wouldn’t we be pushing collateral-based loans, pushing home equity lines of credit. Today, the collateral-based loans that we have available to us through Schwab and TD is literally six or 7% is that rate. And so, we’ve reached out to clients proactively and we’ve said, look, you took out this loan a year ago and the rate was 3%, it is now 7%. If you want to hold onto that loan, great. Maybe there’s a timing issue they needed to fund a real estate purchase. Absolutely. But you need to know that it’s up to 7% and it might not make much sense for you anymore at 7%.

That same analysis goes for credit card debt, auto loans, mortgage, home equity, lines of credit, all of that debt your clients are carrying. You want to look at that and think about that. But having said that, remember we always need a plan B for our clients. We need to open up that home equity loan before we need it. We need to have a plan B in case things go south. And so that’s tip six.

7. Rising interest rates

And then seven is sort of connected with that is rising interest rates mean that we’ve had high inflation and that has affected your client’s plans. So, if you had in there a hundred dollars a week on a food bill, I mean I can tell you right now, you show up to the store, you buy a pack of gum, it ain’t a hundred dollars anymore of those food bills, right?

It is a lot higher. And so, you want to be looking at those financial plans and be realistic about it, right? A hundred dollars a week on a food bill, that’s probably not accurate anymore. Oh, we’re getting a new car and we’re going to finance that at 3%. That’s not working anymore. We need to refinance our home mortgage and we think we’re going to get 5%. Nope, that’s not going to work either. So, you just want to keep an eye on these things as you’re doing your year-end meetings with your clients. And those are seven sorts of year-end tips.

Sean Bailey: Great. Well thanks so much Debbie and everyone. We’ll be back next month. Take care now.

Debra Taylor: Thank you everybody.

Sean Bailey: Here we go. So, Debbie, you have something coming up in New York City next month. Can you kind of give in a plug for that?

Debra Taylor: Sure, I’d love to. So on Thursday and Friday, November 2nd–3rd, Jeff Levine and I are teaching our Savvy Tax Planning Workshop and it’s very exciting to be back in person back in New York, not virtual. And of course, fall is beautiful in New York. So why should you come? Should take time out of your busy schedule? Well, first of all, I spend almost three quarters to an entire day talking about practice management, how to implement great tax planning in your practice. A lot of the things that I’m writing about, talking about in the podcast, but really bring it all together. And then a big part of it is the tech stack. And you really these days need the tech stack to get this job done as effectively as possible. And so, I spend a good chunk of time walking you through our checklist, how to think about this, how to communicate with your clients on this.

And I bring my entire playbook. Nothing is off limits. And if we’re in the room, then there’s great dialogue, great back and forth, and nobody walks out of there feeling that their time is wasted on Jeff’s part, Jeff gets into the Secure Act, Secure Act 2.0, IRAs, taxation, all of that stuff that is so important for you and with your clients so that you know what to look for. You can issue spot is what they call it in law school. And you know how to think about all of this. And Jeff is nationally renowned. There’s nobody smarter, there’s nobody that knows more about this. And so between the two of us together, there’s I think a great synergy because Jeff’s talking about all the rules, all the laws, super current, and then I talk a lot about how to apply it in your practice, how to integrate it, how to bring it back to your team and your clients so that this is all really very quantifiable and helping your bottom line, helping you to close prospects. So please come. We’d love to see you. We’re thrilled to be in person and thank you.