The Wiser Financial Advisor Podcast

Get Real. Get Honest. Get Clear.

Year End Tax Planning

Are you leaving some of your money on the table simply because…
1) you didn’t take the time to plan or 
2) didn’t educate yourself on how all this stuff works?

In this episode, host Josh Nelson let’s you how important it is to be proactive when it comes to preparing your end of year taxes. Don’t just assume you know what’s going on because tax codes are changing all the time.  Listen to this important episode where Josh really digs in deep to help you understand where you are on this subject, what the rules are and what decisions you may need to make, or not make, that could work to your advantage.


Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly: . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service.

Let the financial fun begin!

This week we are talking about everyone’s favorite topic—taxes! Specifically year-end tax planning. The reason this is so important is that oftentimes people are leaving money on the table simply because they didn’t take the time to plan or didn’t educate themselves on how all this stuff works.

The bottom line is that the tax code is pretty darn complicated and there’s a lot to know, plus a lot of it changes all the time. So when it comes to tax planning, it’s important to be proactive and not just assume we know what’s going on. We want to really dig in deep and understand where we are, what the rules are and what we need to do.

What decisions do we need to make or not make that could work to our advantage? Now, I work with a lot of Certified Public Accountants (CPAs) in the community, and just to be clear before we get started, we Certified Financial Planners do not replace your tax advisor. We are not tax advisors. As Certified Financial Planners, a pretty significant portion of what we do with clients involves planning for taxes and income in the future. This is an important topic, but it does not replace your tax advisors, so make sure that they are in the loop and that you do your planning with them as well.

Today is about surfacing some issues, things that you may not be aware of, or maybe you are aware but you forgot because we’re all busy. The world is very busy and it’s easy to get distracted right now because of all the information flowing around out there. Also, we try to have some fun in between, of course—and as Certified Financial Planners, we think this stuff is fun. Maybe that seems really sad to you, but you need people like us. You need advisors who think financial stuff is fun! It’s interesting to us to dig deep and understand how it works from a planning standpoint.

When it comes to your year-end tax planning, begin where you are today. And here at Keystone we like to take a look at the prior year tax return as a starting point. We need to take advantage of what we know from the past, because it may provide reminders about this year or future years. For example, if you’ve deducted charitable contributions in years prior, maybe you’re still making those charitable contributions—but they send the tax statement through to your email and maybe it went into the spam folder so you forgot to put it down as a deduction. Nobody is going to be checking on that for you. Nobody but you is going to be taking a look at your inbox, so you need to be aware of this and make sure your tax people and your financial planners have the information they need to help you plan.

So looking at the prior year tax return as a starting point, we adjust for changes in your situation. You might have had some life changes or you might have done things differently during the year. You may have made an extra charitable contribution or participated in a new employer’s 401K. You might have done a Roth conversion. It’s important to look at any capital gains you’ve had. We’re going to dig into a lot of this stuff as we go, but it’s important to understand where you are exactly at this point in the year, so you can make some moves on an educated basis between now and the end of the year. Or in some cases it will turn out best if you don’t make certain moves, depending on your situation. It’s helpful to be aware of where you are and aware of changes in the rules. We have a tax code that’s very complicated, more complicated than it needs to be. That’s because it’s been designed by politicians that all have special interests. Bottom line is that the tax code is complicated and it changes all the time. That’s why it’s important to work with advisors that really keep up with this stuff so you don’t end up leaving money on the table.

Finding out where you are so far in the year means looking at what types of income you’ve had. Have you had ordinary income from work? Have you had any tax-free income, qualified dividends? Social Security income? Have you taken capital gains by selling stuff such as land or property or stock? Maybe you have a mutual fund that sold some stock which resulted in capital gains you didn’t even know about. The idea is to make sure you’re really aware of where you’ve been and where you are so far for the year. Then, you’ll want to understand what the rules are.

Now, today this is going to be kind of a tax buffet of information. The way I came up with what I’m going to talk about is simply from what comes up the most in conversations with clients. We talk to people every single day about their situations. We talk to people and their tax advisors, their attorneys. This stuff comes up all the time and that’s why I’m raising these topics today, a buffet of financial issues to chew on.

It’s important to be aware of any retirement contributions you’ve made for the year. Were they Roth IRA contributions or traditional IRA contributions? In other words, were they pretax or after-tax. Are you contributing to the right type of plan for your situation? It’s so important to understand where you’re contributing and what that looks like for your future. Because if you do something like make a Roth contribution, the reason you did that is probably because you think the taxes are better to pay now than pay later. Or if you’re dead set that you need those IRA deductions right now, you’ll probably want to put your contributions into the traditional IRA or 401K instead of the Roth IRA or 401K. Yes, it’s that time of year to be checking what you’re eligible for. Look at your employee benefits now, because they’re going to be sending you stuff anyway on your health plans and so forth for the next year.

It’s the time of year for those of you who are eligible to decide on your health plan. If you have the choice, you need to be looking at whether to go with a high deductible or low deductible plan. Are you eligible for a health savings account (HAS)? The difference in plans tends to be the premiums. You usually pay a heck of a lot more for the low deductible plans. For those of you who are not real active users of health benefits, maybe a checkup once in a while but you don’t tend to spend a whole lot on medical stuff, it might make sense to go with a high deductible plan, which probably makes you eligible for an HSA contribution. And HSAs are a tax deduction now as well as tax-free growth and possible tax-free distribution on the back end. They can be a way to get a deduction and also save for some medical expenses. Instead of losing that money, you end up accumulating it over time until it’s dispersed. And if you reach age 65 without spending all your HSA, the current rule says that you can start distributing the money out for retirement income.

So, it’s important to know what benefits you’re activating with your employer and what you’re eligible for. There might also be some special benefits that not everybody gets to participate in. For example, some of our clients get a non-qualified deferred compensation plan that they can contribute to. That’s a way to defer some extra dollars of income and possibly get tax advantages. Of course, there are some risks and some restrictions, but be aware that if you’re eligible for that type of plan, it’s probably about this time of year that you’ll plan ahead for those types of contributions for next year

What about Roth conversions? If you’re contributing to a Roth IRA or 401K, as I discussed last week, you’re deciding to pay the taxes on the income now at today’s rates and betting that it’ll be better to pay now than pay later, because tax rates might be going up. Now, of course, I don’t know that and you don’t know that. We’re just guessing, so it’s a matter of what you believe is going to happen. And if you have the money to pay the taxes now, it might make sense to do some conversion now. By conversion I mean move funds from a traditional IRA or 401K into a Roth. It makes sense to evaluate whether some of your retirement funds should go to a Roth. For most people there probably is an advantage to put a portion into a Roth because you get tax-free growth and tax-free distribution in retirement, and there are no required minimum distributions. It also passes income tax free to any beneficiaries you might have. So, there are some big advantages to Roth. We’re big fans of Roth, and a conversion might be in your best interest. But if you decide to do that, you’ll need to do it quickly because it must be done by December 31st to recognize that income In 2021.

Roth conversions have no limits. You can have as much income as you want and still do a Roth conversion as long as you can pay the taxes on the income. That’s important, of course—figuring out if you can stomach paying the taxes on that conversion. Be very clear about what that means to you and how much it makes sense to pay for this year out of pocket. A Roth conversion could be very useful to you and your family as a planning mechanism, but make sure you know what you’re doing and do a tax estimate. Make sure somebody does that for you so you have eyes wide open because once you do a conversion, it cannot be undone. There used to be a rule that you could undo a Roth conversion after the first of the year for the prior year. You can’t do that anymore. You’re stuck with it, so be aware.

Another thing we should plan on is charitable contributions for those of you who are charitably minded. Maybe that’s something you do on a regular basis, or maybe just now and again. Either way, we should be considering what type of charitable contributions you’re making, what charities you want to benefit, and what the timing of all that might be. Something to keep in mind regarding this: the standard deduction has gotten quite high. For a couple married filing jointly, the standard deduction has risen to $25,100. If you’re single, it’s $12,550 per year. That means you’d need to have itemized deductions adding up to more than those amounts for the charitable contributions and other itemized deductions to benefit you on the tax table. So, sometimes we hear people say, “Well, I don’t want to pay off my mortgage because I like the tax deduction.” Take a look at what you’re actually paying in interest per year. Is it really deductible? I think over 90% of people now are taking the standard deduction versus itemized deductions, so really consider whether that makes sense for you.

Also, thinking about charity, take a look at what contributions you’re making to charity and how much you are doing. Let’s say somebody is giving $5000 a year to the United Way. Well, their standard deduction if they’re married is $25,100. If they don’t have itemized deductions that go over that $25,100, it kind of gets wasted as far as taxes go, right? You don’t get to deduct that. It’s nice that you benefited United Way. It’s very admirable to be giving money away and be contributing to the lives of others. But you might think about bunching together some of your contributions and making a one-time gift of, say, five years’ worth of money you’d be giving to the United Way—or six or ten years’.

You could drop it into what’s called a donor advised fund. This is something we’ve talked about in prior episodes. The nutshell version is that you’re contributing to an account that’s called a donor advised fund, which is a 501c3 charity. Donations you make to that fund end up being a charitable deduction during the year you make the contribution. You could give cash or highly appreciated assets such as stock or real estate. There are all kinds of things you could give to that charity account and take a charitable deduction for that year. This works particularly well when you have highly appreciated assets. Say you’ve got a bunch of Apple stock you bought 10 years ago, it’s probably highly appreciated, and maybe you were going to give a bunch of money away over the next couple of decades. Well, maybe consider doing a contribution of all those assets right up front and taking the deduction today. Then what? As the donor, you have the ability to divvy that money up to various charities over the years, even though you got the deduction up front at the beginning, because that donor advised fund is a 501c3.

A 501c3 is a way to be able to take advantage of itemized deductions that are available for something like a charitable contribution. It’s just taking advantage of a rule that applies to that type of account instead of just giving money away year by year without being able to take the deduction.

Also be aware when you donate to charity that you need to keep track of that stuff. If you give a bunch of stuff to Goodwill or Habitat for Humanity, those might be personal property, clothing, things that you’re giving away. When they say, “Hey, do you need a receipt?” get the receipt. Bottom line, if you get audited they are going to want to see documentation. They’re going to want to see that you have a paper trail, not just a number made up when you filled out your taxes. You need to produce some proof in the case of things like that. Maybe it’s a big contribution, like you donated a vehicle or a boat or something crazy like that. I’ve done that in the past. My wife and I have donated a vehicle before and it was a really neat way that we got to contribute, get a deduction without having to mess with selling the car—and then a single mom ended up benefiting from that vehicle donation. She wrote a nice letter, very thankful. It was heartwarming to us and our family to hear from her. Not that we expected that, but it was great to see how that made an impact on her life.

Make sure that you’re documenting things like that. Get a receipt. And on a major donation like that you’d have to get a Blue Book value. We did that and printed it out the day we donated the car. So anyway, don’t forget those contributions, keep track of them. Dig those receipts out of the file and add them all up. You don’t want to leave money on the table.

You also want to be thinking about where you are now from a capital gains. Capital gains is financial gains from things we buy such as stock or a piece of property. It’s time to ask whether there have been any realized gains—meaning, have we sold anything that would be taxable so far this year?

Remember that mutual funds are often not very tax efficient, so it’s important to look at what investment vehicles you have. They might not be very tax efficient especially if they’re held outside of retirement accounts, so if that mutual fund has been buying and selling stocks and they gain in value, those gains have got to be spit out to investors at some point during the year. Sometimes they hit in December and people get a nasty tax surprise. They might be really happy because they made a bunch of money in the fund that year, but it could be a nasty tax surprise due to having a lot of gains that they didn’t know they were going to have to recognize. It’s important to look at any investment vehicles you own and be aware so you can be as tax sensitive as possible.

Along with checking for realized gains you’ve had, it’s also important to check on any unrealized gains you may have. In some cases you might want to recognize the gain to be able to offset losses. For example, if you believe tax rates will go up in the future for capital gains, you might want to pay those taxes now and reset your basis on a stock. In such a case, selling investments at a loss sometimes makes sense because you might have a bunch of capital gains that have been recognized in your portfolio, and you might be able to use those investments that you sell—or the laws governing them—to your advantage.

When considering future tax planning, remember that historically we’re at pretty low tax rates right now. Think about where tax rates might be going in the future, because we can do some planning today to accelerate the taxes. Maybe we want to pay them today. It’s all about looking at everything you’ve got.

Don’t forget about things you have through the workplace. If you participate in equity award plans like stock purchase plans, or if you’ve had restricted stock or stock options, be aware of any tax implications there. Think about your entire portfolio. We don’t want any tax surprises. We want to be proactive and aware of what’s going on.

Let’s say you’re retired and drawing income. You’re done putting money in, but you have distributions coming out, so it’s important to be strategic and take advantage of the tax code. Possibly you’ll want to keep below certain income levels.

We love tax diversification, which means we’ve got things in different tax statuses, for instance a Traditional versus a Roth account. And it’s also good to have some after-tax stuff in brokerage accounts that are not retirement accounts, simply because then we can stream income from various sources. Then we’re thinking about distribution strategies for where we’re getting all of our income from. What do we have from Social Security income or dividend income? What do we have from a capital gains standpoint?

Are we forced to take required distributions and is there a deadline? Maybe you turn 72 this year and if you have money in a Traditional retirement account, there’s a new deadline to be aware of. Age 72 is the magic age when you are required to start taking required minimum distributions. It’s important to be aware of what the deadlines are and how much you need to take out, because failing to follow the rules on required distributions will carry a 50% penalty. If you don’t take the money out, that is a nasty surprise. I’ve never had that happen, by the way. We try to be really proactive and watch all our clients’ accounts to make sure nobody forgets to take out those minimum distributions.

Don’t forget to deduct deductible expenses, either. I know that sounds pretty obvious, but this happens all the time where people just forget about something that would have been deductible. For example, a number of times here in Colorado over the years, people set up a deductible 529 savings plan contribution, a college fund—and then they forget about that deduction. For those deductible 529 contributions, remember that nobody is going to chase you down and remind you to take that deduction on your tax return. Here in Colorado, that’s deductible from a State standpoint.

You need to put that down and deduct it so you don’t leave money on the table. And if you made health savings account contributions this year, make sure you put that on your taxes because that’s deductible. If you made retirement contributions, things like Traditional IRA contributions, those are deductible. Let’s say you put solar panels on your house so you could get some tax credit on your income tax return, remember you did that. I know I’m being repetitive here, but it’s important to really think back on your year. Think about all the things that happened, all the things you did with your house and your vehicles and your charitable organizations, things at work. Brainstorm to add to that list. Go through and make sure you’re not leaving things out. And don’t take my word for it. This episode is about surfacing some issues, so please consult your tax advisor on all this stuff.

This question comes up a lot: “Do I need a tax advisor or should I just keep doing what I’ve been doing? I’ve been using TurboTax for years.”

Personally, I use a CPA because she’s very good and she helps me out, not only with understanding all the rules like we talked about today but also making sure I’m not leaving money on the table. So personally, I use a CPA but I know a lot of people don’t. They think their situation is simple enough that they just use TurboTax. I’m not going to yell at you either way. What you do is up to you and what you’re comfortable with. But there is some advantage for sure in working with a tax advisor because they’re trained to stay current with this stuff and really ask a lot of questions that might benefit you. In a lot of cases they end up paying for themselves. We like that. We like to pay for ourselves here. And if Financial Planners are doing their job, they’re probably going to bring up some ideas you wouldn’t have thought of otherwise.

Today was about bringing to the surface things you may not be aware of—or possibly you were aware but forgot about because we’re all crazy busy and have a lot of distractions.

I would never advocate cheating on your taxes, by the way. We’re not talking about doing things that are illegal. We never do that—that’s way over the line. The consequences are too large for that to be worth it, and it’s not the right thing, either. There’s a difference between cheating and having a solid understanding of the tax code and using the rules to your advantage and your family’s advantage. There’s nothing wrong with that. Again: Don’t leave money on the table. We want to make sure we’re using these rules to our advantage and also looking into the future and thinking about what the future might hold. We’re planning proactively so it’s purposeful, not just by accident. Most people plan by accident and just letting things happen.

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Thank you so much for being here. Have a great week and God bless.

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.