Taxpayers have any number of deductions and credits that they can take to reduce their tax burden, but those looking to get a break for their investing activities have a more limited menu of choices.
Here are five unusual year-end tax strategies for investors to reduce what they owe.
1. Check out a donor-advised fund
A donor-advised fund is a great way to work around the relatively high standard deduction on taxes, which may limit your ability to gain additional write-offs for your charitable contributions.
By making a charitable contribution to a donor-advised fund (before year end), you’re able to deduct that amount from your taxes this year. Meanwhile you can distribute the funds in later years, and the money can even grow tax-free in the fund, providing more benefit to the charity.
2. Give directly from your IRA
A donor-advised fund is optimal if you’re able to exceed the standard deduction, but if you’re not able to reach that threshold and want to give anyway, then you can give straight from your IRA.
“For those who are of required minimum distribution age and might not be itemizing taxes, qualified charitable contributions are a great way to give directly to the charity from your IRA,” says Michael Kojonen, founder and owner of Principal Preservation Services in Wisconsin.
Normally, investors with a traditional IRA and subject to a required minimum distribution (RMD) could use the qualified charitable contributions rule to exempt their distributions from tax.
Although the RMD was suspended this year as part of the CARES Act, investors can still donate the money and claim the deduction, says Kojonen.
You’ll need to take care of your charitable giving by the end of the calendar year.
3. Convert your traditional IRA to a Roth IRA
And if you’re able to get out of a required minimum distribution from your traditional IRA, it may be a good time to convert that fund to a Roth IRA. You can save on taxes that you might otherwise have paid if you converted in a normal year. The calendar year that you make the conversion will determine when you’re taxed.
The Roth IRA remains one of the most popular retirement plans because of its tax-free benefits.
4. Look into trusts
Trusts can be an effective way to achieve all kinds of goals when you’re planning your estate. Given a relatively favorable tax regime — and the potential that the Biden administration may make it less favorable — it might make sense to establish a trust to sidestep future tax increases.
With the lifetime gift exemption amount at a historically high $11.58 million per person (in 2020), Mark Brown, CFP and managing partner at Brown and Co. in Denver, suspects the amount will decline in the future.
5. Older workers can still contribute to an IRA
While contributing to an IRA is a typical game plan to reduce your taxes — and you have until April 15 of the subsequent calendar year to do so — this year saw something new for older workers. The SECURE Act removed the maximum age for contributing to a traditional IRA.
You can also contribute to a Roth IRA, but it won’t reduce your taxable income. Regardless of which type of IRA you contribute to, you have until tax day to deposit your money.
Bottom line: When prepping your taxes, it’s important to begin before the calendar year ends, because some tax moves must be made before the new year.