Book Appointment

End of Year Tax Saving Tips

Season #2

Tips on how we can take advantage of our losses in the market:

So end of the year and end of the year is a great time to start looking at your taxes because you got, you have an idea of how much income you're gonna have earned for this year, and that gives you the ability to actually do some real tax planning and to really.

Really take steps to minimize your tax bill. There are things that you can do after December 31st, but the vast majority and the best stuff is before December 31st. And so highly recommend, right? Something that I do for all my clients is, end of year tax planning. And we, we look for, what we can do to maximize.

Exclusions, our deductions, our credits, and then we look forward and say, okay, what can we change for next year? Knowing that this is, what we've done and the things that we wish we could have taken advantage of that we can do for next year to further decrease our. Tax bill because let's face it the markets, we don't control the markets.

We can manage our investments as best as we can, but the markets will do what the markets will do, right? And in retirement, we need, every penny we can. So let's, we're gonna try to manage that as best as possible. But taxes is something that, once you owe it, it's forever gone,

And so we need to, every penny that we can save on taxes is a penny. More in our pockets market. Come up and down. Inflation, nothing we can do about it. Taxes, there's always something you can do about taxes.

What is Tax Loss Harvesting

tax loss harvesting probably one of the best things to do and I should preface this by saying you need to be in a position where it'll do you some good, right?

And that requires, that's one of those things that doesn't happen overnight. It takes, years of working to get yourself into a position where tax loss harvesting is something that really pays off dividends. And that's a little bit of a pun and you'll see in a second, but, Tax law is harvesting and it's most basic.

My, my account is down in value. Let me harvest all those losses, right? This thing, you're going through the field and you're harvesting those losses and you're not gonna pocket those and you're gonna use them for some time in the future to reduce your future tax bill. And you can do this with gains, and you can do this with losses, but losses are the most beneficial because it offsets those gains.

And even a small part of that can be used to offset ordinary. Now, here's the best thing, right? I said, it takes some years to get into a position where you can really use that tax loss harvesting and really benefit you. . But vast majority of people have their money in retirement accounts.

If you're, if you move, and you work to get your money out of those retirement accounts, so you're not subject to require minimum distributions, what you can. Is, make it so that all of your gains in your taxable accounts are completely offset by losses. Because what's the one thing that, that we know for certain about the markets?

The markets are volatile. They go up and down, and so in the moments where the market goes down, it doesn't have to stay down for very long, but let's say it goes down 5% one day, right? If we harvest that loss and capture. And we ride the market back up, right? But we harvest that loss, put it in our pocket, we can offset it again in the future.

We can offset it when we're selling for income so that our taxable income in our taxable base in retirement is much lower. It sounds like a lot of work. It's definitely work. Saving, saving money on taxes and making money in the markets is not easy work, right? It's not say a fire and forget it, but it's something that can make a huge difference in your retirement if you do it properly and you shouldn't do this yourself, right?

This is why you pay advisors is to do things like this.

(P.S. Here's a great article I wrote on Tax-Loss Harvesting:

What is a Roth Conversion

So a Roth conversion is a what I like to call it is tax arbitrage.

And tax arbitrage. Arbitrage is fundamentally, it means taking advantage of a mismatch in pricing. For instance, let's take a basic example. Let's say I am buying, Cotton, right? And or I'm buying, oil, right? Oil, let's say oil, right? So oil in, Saudi Arabia, oil is, a hundred dollars a barrel.

And in, Texas, it's, $90 a barrel. So there's a price missed batch of $10 a barrel. So if I were to buy. If I were to buy oil in Texas and I were to sell it on the open market I would be able to arbitrage that and get that $10 a profit, right? It's the same thing, same value, right?

And I can realize that difference when we look at taxes that way. And we add in a factor of time. So it's not just right now, it's also in the future. And we say, okay, right now my taxes are lower, or my taxes are higher, and in the future they're gonna be lower, they're gonna be higher, right? And I can control my taxes because this is something that I actively work on as to control my taxes.

I can take advantage of that mismatch and pricing. So let me give you a perfect example. I'm working, right? , working towards the end of your career, you're probably making the most amount of money you're ever gonna make, right? Which means you're in the highest tax bracket possible. Now, what happens when you retire?

What's the first thing that happens? You lose your w2, right? You stop making income and you have to start taking money from your retirement accounts. Now there's this period from when you retire until the IRS requires that you take required minimum distributions from your retirement.

Which right now it's at age 72. It might get pushed out to age 75. So you have this opportunity, this time period where you need to take money from your retirement accounts, but the IRS doesn't require you to take them yet. Which me and you're in the lowest tax bracket possible because, so you're at zero, right?

Because now you get to control how much income you have for the next, whatever. 10 years, five years, seven years. Until you are required to take RMDs, you control your income, which means you control your tax rate. So you can decide when and where and how to take your income, and maybe you'll take a little bit more one year because you're in a lower tax rate to convert it, pay taxes on it upfront in those low years so that in the future you're not paying more money.

And so a Roth conversion is taking advantage of that mismatch and pricing. And it's taking money from your traditional retirement account, your traditional ira, you pull that money out, pay taxes on it, and then put it into this Roth IRA account where it grows tax free tax tax free. When you take the money out, it's tax free.

The only caveat is you gotta have it in there for five years or more. Otherwise you get hit with a 10% tax penalty.

Check out this great article on Roth Conversions:

Tax Worries for Retirees

The biggest thing that's on the horizon that I, the two things that I really worry about number one is we have the tax cut and jobs. Which one of the biggest provisions in it is that it inflation adjusts the tax brackets. And so that means that, the tax brackets where they are right now, they weren't there 15 years ago.

And the tax cut and jobs act was, 20 18, 20 19. It's, if it goes back to those levels, it is really low numbers and that will automatically bump people into higher tax brackets. So that's something that I worry about is, you know what happens when the tax cut and jobs act expires and the tax brackets automatically by default will increase, right?

Or rather the number, the brackets will decrease and everyone's gonna jump to a higher tax. What happens at that point Now here is what worries me about it. Okay. Tax cut, tax code changes with every administration and every four to six years it's constantly changing, right? That's nothing new about that.

What I'm worried about is that. We have interest rates are rising, which means that our federal deficit, which is at 30 trillion, the payment that our government has to make in order to meet those obligations in order to pay the servicing cost, the minimum payment on that debt is going to increase over time.

And as that increases, they're gonna need to generate revenue from somewhere. I can totally see our Congress, being deadlocked and not passing a bill, and them intentionally not passing something when it comes, when the tax cut and jobs act expire. Because they need the revenue to cover those tax payments to those interest payments.

I can see them letting it expire without a new bill or with an inadequate bill that doesn't inflation adjust the tax brackets intentionally so that it harms. The average American, because that's who gets the harmed the most by that. And it increases their tax base, and they're just gonna point the finger at the other party and say, it's their fault.

It's their fault. Especially now we have, Congress is really, the Senate and the house. It's very close there. There isn't a clear majority. It'll be very easy for them to do. And that, that is really what scares me is that will happen and then everyday Americans will pay a lot more money and this will fall especially on retirees.

And there's gonna be no blow back on, the, every party is gonna think it's an advantage to them. So it's not like one of those things like cutting social security where everyone's gonna get upset. It's, whichever party thinks they have the most to gain is. Is gonna benefit.