A Time for Giving Thanks and Looking Forward.
Inspirations for Planning are all Around
It's the season for giving thanks and planning, and this is my favorite time of the year. The weather turns cooler, leaves change color, and holiday lights illuminate magical paths along streets and riverwalks. Here are some recent photos from my time in my hometown. When you've lived somewhere for a long time, discovering new places or things to do can be challenging. These photos captured experiences new to me. While a dinner walk on the riverwalk is familiar, the new light architecture was stunningly different and pretty. Visiting a local park, which I had never been to before, yielded beautiful photos, showcasing the city vibrant life and is ready for the next generation. I saw the city officials' planning efforts in my beautiful hometown. It reminded me of the importance of planning for both our peace of mind and the enjoyment of future generations.
The Joy of Year-End Planning
I’m reminded of some work I started in early November. It is a work in progress that has a few pieces still to complete. Like those pretty puzzles my mother works on, I’ve been doing my spreadsheet work a little at a time. Funny as it may sound, I enjoy solving simple spreadsheet puzzles and it cannot happen all in one sitting so I do a little as I go, feeling a small accomplishment each time I close the file.
How can you start your year end planning work? I’ll share with you coaching tips along the way. This is not advice but rather educational items for your consideration. Here is the first tip to consider.
Coaching Tip to Consider: Start estimating your year-end earnings, dividend, and interest figures, estimating deductions, and entering what taxes have already been paid. Start a simple spreadsheet to capture your personal tax information. You will be surprised how many folks have not set aside enough for their taxes. If that turns out to be your situation, you can make a change on your w-4 form this week.
Gaining Insight from Last Year's Tax Return
This is a pretty new process for me – believe it or not. In the past, I tended to outsource more tax thinking than I now would like. As part of my 2023 goals, diving deeper to understand the complex world of taxes has been on my list of goals. With retirement, I've been able to delve deeper into these complexities, aiming to be more active in managing and forecasting my taxes. While the Tax Cuts and Jobs Act (TCJA) was meant to simplify tax returns, it can still be complex for business owners or those on the investment spectrum. And with some of the provisions expiring in at year-end 2025, planning is becoming even more important to understand now as those favorable provisions are set to expire.
Coaching Tip to Consider: Pull out your 2022 return and read it over. With the distance of time, there is less stress when reading the artifact of your financial results. This review will help you figure out some of your 2023 numbers and where you may fall in this year’s tax brackets.
Valuing Professional Relationships
Working with a good CPA can be effective for tax planning. Their billing structure might include tax planning with your return or as a separate charge. While some tasks you can probably handle, professional advice can be valuable in certain situations.
Coaching Tip to Consider: If your CPA does not provide any true planning services, to help you manage your tax obligations, discuss with them if this is a service they offer. Pricing for this service alone can range from $1,500 to $4,000 for most services. Billing can be much higher if you have very complicated tax planning. For most, the range provided will cover most people.
The Importance of Being Low-Maintenance
Being a low-maintenance client is vital in today's tight labor market. CPA firms are finding it difficult to keep good talent who are looking for a more balanced life and not working crazy hours during tax season. This might sound odd to some, but like florists who are turning down orders to keep the business and staff on a steady course, CPA firms are more actively evaluating clients as part of the culture they offer their staff who are seeking a more balanced approach to client management.
In a tight labor market, firms are looking for clients who are a cut above the rest. I call these low-maintenance clients. As a client, this means providing complete and timely documentation, proactive communication about changes, quick response times to CPA’s questions, and timely reviews of the returns. All of these behaviors are key to maintaining a strong professional relationship. This approach not only makes the process smoother but is also cost-effective in the long run for you as the client.
Coaching Tip to Consider: Start your documentation gathering now. Go through your calendar and review any major financial activity you may have encountered. Start documenting things like the college class you took which might be eligible for a tax credit, buying an energy-efficient home solution, etc. Also, review your financial institution statements to see if you had any large inflows or outflows. These might be activities that need to be documented for your CPA professional. Finally, if you don’t already do this, consider sending a holiday card to your CPA professional. The holidays can be anxious times as people plan for their “busy season.”
Preparing for Charitable Contributions
It's time to gather documents for charitable contributions. I use a spreadsheet to track all donations, including the date, amount, organization name, type of donation, and any notes. Being organized with documentation is crucial for your peace of mind, especially for in-kind contributions that require additional documentation for potential deductions. I've also found it helpful to save receipts in an online folder and use one credit card for all my commitments, simplifying the tracking process. However, these last two years have become more work to organize than I would like.
Coaching Tip to Consider: Consider keeping track of your contribution types: cash contributions, appreciated stock donations, in-kind services provided (if you paid to a third party for the services), in-kind purchases made directly for the benefit of the non-profit, etc. Your tax professional can assist in determining if your in-kind services may be deductible. Hint: if you hired someone to do the work vs. doing the work yourself will be an important distinction to share with your advisor.
Added tip: review your calendar for your mileage for charitable work you have done this year for the qualified charitable organizations you have worked with. The reimbursement rate is only $0.14/mile which is better than nothing.
Maximizing Charitable Giving
With Giving Tuesday approaching, now is the time to compile a list of your donations already made this year. Bunching donations together that you would otherwise make over a two-year period could be helpful as you review whether you are close to itemizing your deductions vs the standard deduction.
Considering a Donor Advised Fund (DAF)
A Donor Advised Fund could be an efficient way to manage charitable contributions, especially for significant or appreciated asset donations. I’m a fan of Fidelity Charitable for its lower fee structure and variety of investment options. It's a convenient way to manage donations and make significant yet fewer contributions. In a recent report from Fidelity of DAF owners in my metropolitan area, the average donor made slightly over 12 donations with an average donation of ~$3K in 2022. These folks have figured out how to minimize the paperwork and maximize the strategies for tax purposes. While there are still fees for this type of solution, I’m leaning to more actively utilizing this solution in 2024 to simplify life and bring greater peace of mind.
Coaching Tip to Consider: If you are considering a Donor Advised Fund, add Fidelity, Charles Schwab, and Vanguard as part of the organizations you review. Their fund fee structure is far less than public foundations that offer the same DAF service (I’ve seen 5% fees on public foundations – yikes, this is too high and you do not have any say on the investment strategies. That alone is reason enough to look for solutions that provide you more agency on how your funds are managed and distributed.)
Other Tax Planning Strategies:
Deferring Income: If you expect to be in the same or a lower tax bracket next year, consider deferring bonuses, consulting income, or self-employment income by increasing your 401K or IRA contributions.
Deferred Compensation: For 2024, deferred compensation plans are open for enrollment if your company and job title within the company permit it.
Coaching Tip to Consider: Be mindful of the deferred compensation requirements. If your company requires you to purchase stock to participate, even if they offer a match, carefully review if this option is right for you. As an employee, you already have a lot of eggs in one company basket. If the company is financially healthy, low debt burden, strong quarter-after-quarter profitable growth, then you may want to consider if it fits your personal financial planning goals. If your company is not financially healthy, has high debt, no real profitable growth through improved products, top-line growth, etc. you will want to be very careful. In this high-interest rate environment, public markets are not friendly to those companies with any of these negative attributes. And, if you are having to buy shares to participate in a deferred compensation plan, others may be benefiting more from your deferred plan than you.
Maximizing Deductions: Pay deductible expenses like property taxes or medical expenses in December. Surprisingly, many surgeons are busy during December as patients schedule medical procedures for tax and insurance purposes. If you are someone considering a procedure your time to book is fast closing, especially if you want to be in a medical facility with good ratings on patient care.
Coaching Tip to Consider: Review your property tax bill. If you are in the state of Texas, you will notice that your bill was more than likely lower this year than last. This was due to the expected passage of a proposal that went up for a vote to the Citizens of Texas. You will probably see a $60,000 increase in the Texas homestead exemption and in some cases slightly lower rates year over year. All this to say, review your property tax bill for noticeable changes in the expense especially if you are estimating your expenditures for planning purposes.
Harvesting Tax Losses: Selling securities that have lost value can offset capital gains. However, be wary of market timing, as studies have shown its ineffectiveness.
I’m Not a Fan of Tax Loss Harvesting. Why?: Most simply tax loss harvesting can normalize incurring losses in years when markets are down, yet the economy, industry, or company are not permanently impaired. This is my own personal perspective and not advice, but let me share why I limit Tax Loss Harvesting for myself:
First, do the work to determine if this is an asset you have been looking to own for a long period of time. Then, purchase at a price that has a margin of safety (meaning you are buying it on sale). Buying on a margin of safety is not easy to do.
If I do these two things with a sense of discipline, then when markets get irrational, I can be somewhat more rational than the market. What is an example of a difficult market? Well, 2022 would be a great example.
Last year the S&P was down 18% while the NASDAQ was down 33%. You will find some tax professionals say this is a great time to harvest those losses and offset against some gains. That might be true, however, if you have conviction in your ownership, selling out of the positions with the intention to get back in after the beginning of the year is much harder to do than you might think especially if the market continues to decline. The market timing of when to get back is difficult to predict and in many cases, it is just too difficult to stomach for most of us.
While I’m not a fan of market timing to each their own. Here are two articles that explore the complexities of market timing in investments, highlighting its challenges and the diverse opinions surrounding it. One of the articles also addresses various strategies and opinions, from critics who favor a more steady investment approach to proponents who advocate for timely market decisions. I share this with you so you can draw your own conclusions.
Having said that I'm not a fan of Loss Harvesting, as for me it normalizes behavior incongruent with my personal style of money management, you should consider this: If you find yourself with an investment that has lost value and your conviction or thesis has changed, meaning owning the asset no longer aligns with your original thesis, then consider harvesting your loss to offset some of your capital gains. Those are good reasons to sell which are very different from trying to offset gains in assets one would otherwise keep.
Believe it or not, selling a losing investment is harder than you may think. So many people want to hold on to assets that are underwater (worth less than they paid for). Even Charlie Munger on a recent podcast shared how he held onto Hyundai Motors until it returned to what he paid. Wow, even the most tempered of investors can experience loss aversion!
Coaching Tip to Consider: Review your prior year’s return. See what Long-Term Losses and Short-Term Losses you may have carried forward into 2023. These are already decisions you previously made. You will want to see if you can offset some gains vs these losses. If now is not the time for you to sell, keep track of these assets. When you have investments that no longer fit your investment policy and they have gains, then when you sell and have long-term gains, you can use your losses to help soften the tax burden. Most importantly, keep track of your losses. They are assets.
Retirement Planning Insights
Consider Maxing Out Retirement Contributions: consider contributing the maximum to your 401(k), IRA, or other tax-advantaged retirement accounts. Maximizing contributions to retirement accounts and understanding employer match policies could help you achieve your financial goals sooner than you might think. Research whether your employer's 401K plan supports a backdoor Roth. For "super savers," the IRS limits for total contributions (employee and employer match up to $66,000) provide opportunities for strategic planning, especially with catch-up contributions for those over 50 of an extra $7,500.
Coaching Tip to Consider: Take a look at your 401K documents. See if your employer match amount is limited. While there may be a limit on the match percentage there may not be a limit on how much of your contribution they would match.
Example: You contribute up to the tax limits on a pre-tax basis ($23,000 basic limit + $7,500 for those over 50). Your employer matches 6% of your pre-tax amount. You then contribute after-tax dollars as the IRS allows you to do that as well up to certain limits ($66,000 +$7,500 if 50 or older). Some companies will continue to match their 6% on your after-tax contributions above the pre-tax limits.
See what your 401K plan documents state regarding the match. Read these documents yourself. Do not just call your provider and ask. They manage so many plans and I have found a few cases where the answer initially given is not accurate and only when I referenced the documents and my interpretation did, they go back and do further research. It literally just happened last week on a different matter so make sure you read your documents for yourself. No one will care for your personal finances like you will. You are your best friend and advocate. 😊
Advanced Retirement Strategies
Backdoor Roth Conversions are a favorite strategy, depending on your company's 401K plan document provisions. The IRS limit for combined contributions and catch-up contributions offers major strategic opportunities for high earners to still contribute to a Roth IRA.
Roth Conversions and Tax Withholding - Consider converting a traditional IRA to a Roth IRA if you anticipate being in a higher tax bracket in the future. Also, keep in mind, rates will revert back to the 2018 tax brackets, adjusted for inflation starting in 2026.
Review Your Withholdings - Ensure your withholding is accurate to avoid under or overpaying taxes. Especially now that it pays to save, it is better to have any excess tax withholding earn money for you at 5%+.
Coaching Tip to Consider: In 2026 the tax rates and tighter tax bracket ranges (factored for inflation) will resume to the 2018 schedule. If you are continuing to grow your income, managing your taxes will become even more important as we approach 2026.
Joy in Planning: Engaging in year-end tax planning is akin to solving a puzzle, bringing satisfaction with each small step completed.
Tax Return Insights: Delving into last year's tax return offers valuable lessons, especially important as some provisions of the Tax Cuts and Jobs Act are set to expire at year end 2025.
Professional Relationships: Partnering with a good CPA can be effective in tax planning, with costs ranging from $1,500 to $4,000 for most services.
Being Low-Maintenance: In a tight labor market, being a low-maintenance client (providing complete documentation promptly) is key to a good CPA relationship and can be more cost-effective.
Charitable Contributions: Time to organize documents for charitable giving; using a spreadsheet and a dedicated credit card can simplify tracking.
Donor Advised Funds: Review Donor Advised Fund options as an efficient way to manage significant charitable contributions.
Strategic Giving: With Giving Tuesday approaching, consider bunching donations for potential tax benefits.
Tax Planning Strategies: Consider deferring income, maximizing deductions, and potentially harvesting tax losses, but be cautious of market timing.
Retirement Contributions: Maximize contributions to retirement accounts and explore options like after-tax contributions, and backdoor Roth IRA conversions.
Forward Thinking: With changes to tax rates expected in 2026, strategic planning for income growth and tax management becomes increasingly important.
Disclaimer: These are planning strategies I have personally used and I’m sharing with you for educational and informational purposes only. This is not financial advice.
Find out what is right for you. This will involve some time for reflection, forecasting your future income, and learning a bit more about your tax brackets.
With gratitude and joy, blessings to you this holiday season, and happy planning!
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