If you have earned less than anticipated this past year, there are a handful of tax strategies to help you.
If you have earned less than anticipated this past year, there are a handful of tax strategies to help you. You may have an opportunity for portfolio rebalancing, Roth IRA conversions, and much more. Read on to learn how the fee-only and fiduciary team at Baltimore-Washington Financial Advisors can help you with year-end tax planning.
Defer Your Tax Deductions
In any lower-income years, it might make sense to defer any itemized tax deductions you control until the next year, when your income might increase again. This way, you could benefit from the standard deduction this year while also “saving up” your itemized deductions in the future when you could make them count.
Rebalancing Your Portfolio for the End of the Year
The balance of your portfolio refers to the different proportions of asset types in it. This balance should reflect your risk tolerance and personal investment goals. Sometimes, based on market performance, that balance becomes skewed, resulting in an asset mix in your portfolio that does not match your risk tolerance. Rebalancing means adjusting that proportion to a preferred ratio. If you sell during a higher-income year, the additional gains you earn may push you into a higher tax bracket (if short-term) or be taxed at a capital gains rate (if long-term). However, by selling at the end of each year with lower taxable income, you could offset this gain due to your lower tax bracket while also buying low if asset prices for the year are lower, too.
Another strategy, which is known as “tax-gain harvesting,” could help you minimize any capital gains tax by selling appreciated assets during lower-income years.
Consider Potential Roth Conversions
Roth conversions could be an incredible long-term strategy since they move taxes from the future to the present. However, converting a tax-deferred account to a tax-advantaged account, such as a Roth IRA, comes with a potentially expensive price tag: paying taxes on the amount you do convert. Executing a Roth conversion to tax-diversify a portion of your retirement accounts during a lower-income year or a year when your tax-deferred account has lost value could be a smart move for the future. This way, you could pay taxes on lower asset value in the account while taking advantage of a lower tax bracket.
Contact Baltimore-Washington Financial Advisors if you are in need of assistance with your year-end tax planning this year!
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Baltimore-Washington Financial Advisors is a nationally recognized Fee-Only and Fiduciary wealth management firm, providing comprehensive wealth management since 1986. We integrate investment management, retirement and estate planning, and tax services so you can relax knowing your money is safe. We serve clients throughout the Mid-Atlantic, nationally, and specifically in Annapolis, Baltimore, Ellicott City, Hunt Valley, Catonsville, Pikesville, Bethesda, Columbia, Rockville, Gaithersburg, and more! We’re here to provide you with the best services and advice when you need it. For more information on how we can help, visit our website, or give us a call at 410-461-3900!