Tax Read Time: 6 min

Tax-Saving Opportunities You Shouldn’t Overlook

With tax season here, it's important to consider how tax-intelligent financial planning can lead to potential tax saving opportunities. By taking advantage of various strategies, such as IRA distributions and conversions, capital gains and capital loss carry over and charitable giving, you can potentially lower your tax bill and keep more of your hard-earned money.


One strategy to consider is IRA distributions and conversions. If you have a traditional IRA, you may be able to convert it to a Roth IRA, which can provide tax-free income in retirement. Additionally, taking advantage of qualified charitable distributions from your IRA can satisfy your required minimum distributions and lower your taxable income. Let’s take a deeper look into this strategy:


IRA Conversions

In certain situations, it may be advantageous to move some or all your funds from one retirement account type to another. A Roth IRA conversion can be beneficial, especially if you anticipate a high income in retirement. However, before converting, you should consider the potential increase in taxable income, the five-year holding rule and the tax implications of converting if your original retirement account contains pre-tax contributions. Withdrawing money from your account early to pay conversion taxes could also result in penalties. It's crucial to weigh the pros and cons before proceeding with a conversion.


IRA Distributions

There are various strategies to consider when it comes to withdrawing funds from your retirement accounts. Two approaches worth considering:

  • The traditional method: Withdrawing from taxable accounts, tax-deferred and Roth accounts in that order.
  • The proportional withdrawal method: Withdrawing from each account based on its percentage of overall savings until reaching a target amount.


The traditional approach aims to allow tax-deferred assets more time to grow. Proportional withdrawals can lead to a more stable tax bill, potentially lower lifetime taxes and higher after-tax income. Depending on your unique situation, one method may prove to be more beneficial than the other.


Another strategy is to consider your capital gains and capital loss carry over. By selling investments with losses, you can offset gains and potentially reduce your tax bill. Any remaining capital losses can be carried over to future tax years. Here are some ways this strategy could save you on your tax bill:


Capital Loss Carryover

If you sell stock or mutual funds at a loss, you can use the loss to offset capital gains from similar sales. Current year net losses up to $3,000 can be reported, or $1,500 if married and filing separately. Net losses over $3,000 can be carried over to next year's return indefinitely. Unused prior-year losses can be subtracted from the current year's net capital gains and a loss up to $3,000 can be reported and deducted from income.


Capital Gains

Capital gains taxes are owed when an asset, such as investment securities, real estate or an investment property, is sold for more money than was paid for the asset. The tax rate depends on the length of time the asset is held, with long-term holdings taxed at a lower rate than short-term holdings.


There are several strategies you can implement that can help you to minimize capital gains taxes. Here are four key strategies to consider:


  • Hold onto taxable assets: Holding onto taxable assets for a year or more is one way to lower capital gains taxes, as the long-term capital gains tax rate is generally lower than the maximum tax rate for ordinary income despite fluctuations in tax brackets and capital gains tax rates.
  • Invest in tax-deferred retirement plans: Since retirement account funds can grow on a tax-deferred basis, the account balances may grow more than they would if capital gains taxes were assessed. Roth IRAs and 401(k) plans take this one step further: Tax on gains isn’t assessed even when funds are withdrawn in retirement as long as certain rules are followed.
  • Utilize tax-loss harvesting: Tax-loss harvesting is a helpful investment strategy where underperforming investments sold at a loss can offset taxable investment gains. Up to $3,000 of ordinary income can also be used to offset these losses each year. Any unused loss can be carried forward indefinitely. However, to qualify for this strategy, you must wait at least 30 days before buying back the stock sold at a loss, or the "wash-sale rule" will prevent you from using the loss to offset the gain.
  • Make charitable donations with appreciated investments: Investments that have appreciated in value from when you purchased them can be donated to charity. You will receive a tax deduction for the investment's fair market value on the date it was donated. Additionally, capital gains tax will not be applied to the donated investments.


Finally, charitable giving can be an effective way to reduce your tax bill while supporting causes you care about. By using the proper tax planning strategies, charitable contributions can reduce three kinds of federal taxes: capital gains (as was just explored), income and estate taxes.

When donating appreciated assets, such as stocks or mutual funds, you can reduce or eliminate capital gains tax and receive a tax deduction for the full value of the asset.


Charitable Giving

Knowing which tax strategies to utilize when making charitable donations can help you determine the amount, asset and timing of your gift to ensure that you are providing the maximum benefit to charity while also receiving the maximum tax advantages for yourself. Here are a few ways you may be able to save:


  • Combine multi-year deductions into one: Due to the 2017 tax reform, many taxpayers may not be eligible for the deductions required to exceed the standard deduction threshold. However, you can still receive a tax benefit by bunching several years' worth of charitable contributions into a single year to surpass the itemization threshold. During non-bunching years, you can take advantage of the standard deduction.
  • Estate planning: Donating assets to a qualified 501(c)3 organization is excluded from the taxable estate. You can also include this in wills and trust stipulations that allow beneficiaries to disclaim part of or all their inheritance in favor of leaving it to a charity. Charitable lead and remainder trusts, annual lifetime gifts and Q-TIP trusts can help ease the burden of estate tax on your heirs while maximizing charitable donations.
  • Donor-advised funds: A donor-advised fund is a charitable giving account that allows individuals to contribute to a charity and recommend grants to any IRS-qualified public charity while enjoying an immediate tax deduction. The funds can also be invested for tax-free growth and offer benefits for organizing and planning charitable giving. Compared to private foundations, donor-advised funds may have more advantages in terms of income, capital gains and estate taxes.


Tax-intelligent financial planning can provide numerous potential tax saving opportunities. Whether building your family and career, preparing for retirement or passing on wealth to future generations, working with a tax-intelligent Financial Professional can be one of your greatest assets and potentially lower your tax bill so you can keep more of your hard-earned money. To determine the best strategies for your unique situation, contact your tax-intelligent Financial Professional today.

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