End-of-Year Tax Planning

Bruce Larsen Bruce Larsen, Financial Planning, taxes in retirement


We are close to ending another year. If you haven’t already, it is time to determine if there is anything you can do on the next couple of weeks to improve your tax situation. Many of the items on the following list are well known to investors but we all need an occasional reminder. It might also be beneficial to read Cory Davern’s End-of-Year Financial Checklist.


1: Maximize Employer Contributions. If you are still employed, and in a situation to maximize retirement savings you should do so. You should also give some thought to next year’s contributions. Many employer plans stop employer matching contributions when you stop contributing, which can result in you having a lower match than you are owed. For instance, the maximum tax-deferred contribution to a 401k plan is $24,000. If you expected to make $80,000 this year you may have set your percentage contribution to 30% to maximize the contribution. Assuming a 3% match, your employer would have contributed $2,400 by year end. But let’s say you had a really good year and your total earnings, spread over the year total $100,000. You would have maxed out your contribution when you reached $80,000 in income and the final $20,000 would not have had contributions deducted and since there were no employer contributions you also don’t get the match. Had you instead set your contributions at a dollar amount – $2,000 per month – you would have received the full match. Small difference but it puts another $600 in your account by year end.


2: You may be able to contribute to a Roth IRA even if you are over the income limits. Anyone can make a non-deductible contribution to an IRA. If you contribute to a non-deductible IRA, you can convert this IRA to a Roth after year end. Assuming no growth on the account (leave it in cash) no taxes will be due on the conversion – assuming you have no other IRA accounts i.e. all other tax deferred money is held in company sponsored plans, not IRA’s. If you have other IRA’s this strategy doesn’t work so don’t try this without a thorough discussion with your financial advisor.


3: As mentioned in a previous blog post, make sure you take your Required Minimum Distribution if you are over age 70 ½.


4: Whether employed and receiving a w-2, or retired and receiving 1099’s from Social Security, Pensions, and/or Retirement plan distributions make sure your withholding is fairly realistic to what your actual tax situation is. While many enjoy getting a tax refund if they have over withheld taxes, giving the Federal or State governments tax-free loans makes no financial sense. Also keep in mind that you can only deduct state income taxes paid on your Federal Return if the tax was Paid, not just Owed. If most of your income is reported on K-1’s or 1099’s, you can also find yourself in a situation of having to pay quarterly taxes next year if the majority of your tax liability is paid with your return when filed.


5: Check your taxable brokerage statements for opportunities for tax loss harvesting. If you sell a position at a loss, the loss can be recognized provided you do not purchase a “substantially identical security” in the 30 days prior to sale or 31 days after the sale. This is referred to as the Wash Sale Rule. If you do not want to be out of the market you should discuss with your financial advisor what you can replace the sold security with while staying clear of the wash sale rule.


If you are married and retired, make sure both of you are maximizing (if possible) the Colorado pension deduction. At age 55 Colorado residents can deduct an additional $20,000 per year of “pension” income from their federally taxable income. At age 65 the deduction moves up to $24,000. Pension income includes: pensions, annuity distributions, IRA/401k distributions, and the federally taxable portion of your Social Security. If a couple, both owning IRA’s, decide to take all of the distribution from just one IRA, part of the deduction can be lost if the rest of the spouse’s pension income, who didn’t take a distribution, is less than the maximum deduction.


Any of our financial advisors would be happy to review your situation to help you determine if any of these strategies could be beneficial. If so, we always advise you to check with your tax preparer to verify the strategy prior to implementing it.


Happy Holidays!