As the year winds down, tax planning takes center stage.
The last months before Dec. 31 are prime time for taxpayers to execute various financial moves before certain tax deadlines arrive.
So which tax strategies are advisors discussing with clients?
To find out, we asked more than 200 financial advisors who are part of SmartAsset’s SmartAdvisor matching platform. Their responses focused on retirement account contribution strategies, tax-loss harvesting and charitable donations. The survey was conducted between Oct. 1, 2022 and Oct. 17, 2022.
Here’s how the numbers broke down.
A financial advisor may be able to help identify tax-savvy investment strategies. Find a financial advisor today.
Top 3 Tax-Planning Moves Advisors Are Discussing at Year-End
Financial advisors responded to the question, “What are the top three year-end tax-planning moves you’re discussing with clients?” Advisors could select up to three strategies.
The most popular response was “Retirement account contributions, rollovers and additional strategies,” which 88% of advisors selected. No. 2 was tax-loss harvesting (83%), and the third-most-popular answer was income deferral strategies (49%).
Keep in mind that financial advisors are not the same as tax preparers. But they often track the tax repercussions of clients’ financial choices and keep an eye on minimizing tax liabilities.
Understanding Advisors’ Top 3 Year-End Tax Strategies
The tax strategies advisors highlight in this study can be complex to maneuver. It's often worthwhile to work with a tax professional and financial advisor to ensure they're executed correctly, recorded properly on financial forms and don't run afoul of any tax rules, such as the wash-sale rule.
For some basics on the top three strategies, however, here's what to know:
Retirement account contributions, rollovers and additional strategies. Retirement savings accounts aren’t just vehicles to save for your golden years. They can be an asset through which taxpayers implement savvy tax strategies.
Maxing out your retirement accounts such as a traditional individual retirement account (IRA), for example, is one way to (temporarily) shield dollars from taxation. The last day to make contributions is often April 15 of the following year.
Other tax-focused retirement account strategies include taking required minimum distributions (RMDs), which isn’t optional but can be an event around which tax-planning occurs, and withdrawing excess contributions. Making a rollover from a traditional to a Roth IRA to pay taxes in a specific year may also be a strategy on some advisors’ client to-do lists.
Tax-loss harvesting. The 2022 bear market may have left investor portfolios in the red, but it does provide an opportunity for clients to harvest tax losses.
The strategy involves offsetting capital gains with capital losses. To do this, investors may sell some securities at a loss to mitigate the tax impact of having sold other investments at a profit.
Bundling deductions. With the standard deduction at $25,900 for married filers for 2022 – and ongoing caps placed on various write-offs – not many folks will likely be itemizing deductions this year. But for taxpayers on the cusp of benefiting from an itemized return, bundling deductions into a single tax year can pay off.
For those taxpayers, the strategy involves taking any qualified deductions in a single tax year to get over the $25,900 hump ($12,950 for single filers). Taxpayers can achieve that by, for example, making charitable contributions in a given year or tallying qualified medical and dental expenses above an income threshold. This may increase their itemized deductions and allow them to deduct a higher amount than the standard deduction, thereby reducing their tax bill.
Bottom Line
While advisors typically don’t file tax returns for clients, they may draw attention to certain tax strategies. Surveyed advisors pointed to retirement accounts, tax-loss harvesting and bundling deductions as tasks they’re discussing with clients at the end of the year.
Data and Methodology
Survey data for this report was collected by SmartAsset between Oct. 1, 2022, and Oct. 17, 2022. We asked financial advisors, “What are the top three year-end tax-planning moves you’re discussing with clients? (Please select up to three items).”
The answers available were:
- Tax-loss harvesting
- Tax-deduction bundling
- Charitable donations
- Filing extensions
- Amending previous years’ tax returns
- Income deferral strategies
- Retirement account contributions, rollovers and additional strategies
Of the advisors surveyed, 212 responded to this question.
Tips for Tax Planning
- Work with an expert. While a tax professional or tax software can help you file your annual taxes, a financial advisor could help you optimize a tax strategy for your entire financial plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estimate your tax burden. If you just want to estimate how much you’ll pay in taxes, consider checking out our tax calculators to see how federal and state taxes may impact you.
Questions about our study? Contact us at press@smartasset.com
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