The tax year ends on December 31, and most of the strategies that lower a high earner's bill have to be done before then. Here are eight moves worth reviewing now, while there's still time to act on them.
1. Run a projection first
Every move on this list depends on where your income will land this year. Start with a current-year tax projection that includes bonuses, equity vesting, K-1 estimates and capital gains to date. It shows which bracket you are in, how close you are to the next one and whether you are on track with estimated payments.
2. Consider a partial Roth conversion
If this year's income is lower than usual, or lower than you expect it to be in retirement, converting part of a traditional IRA to a Roth can make sense. The goal is usually to fill a lower bracket without spilling into the next one.
Conversions count for the calendar year they are completed, so the practical deadline is December 31. Watch side effects such as Medicare IRMAA thresholds and capital gains rates.
3. Maximize retirement contributions
Employee 401(k) deferrals generally have to come out of a paycheck by December 31. Practice and business owners may be able to do more: a solo 401(k), a defined benefit or cash balance plan can shelter significantly more income, but plan setup and funding deadlines vary, so talk to us before year-end.
IRA and HSA contributions for the year can usually still be made until the April filing deadline.
4. Review your equity compensation
RSU withholding is often set at a flat supplemental rate that may fall short of your actual rate. Check year-to-date withholding against your projection and close the gap with an estimated payment or a W-4 change.
If you hold incentive stock options, exercising before year-end can trigger alternative minimum tax. Model it first. ESPP shares sold this year need correct cost basis on your return.
5. Harvest gains and losses deliberately
Realized losses can offset gains, and up to $3,000 of net losses can offset ordinary income each year. If you sell at a loss and buy the same or a substantially identical investment within 30 days before or after, the wash sale rule disallows the loss.
In a low-income year, it can also make sense to realize gains intentionally at lower rates. Coordinate with your financial advisor.
6. Give smarter
Donating appreciated stock you have held for more than a year can avoid capital gains and still provide a deduction if you itemize. A donor-advised fund lets you bunch several years of giving into one year to clear the standard deduction, then grant to charities over time.
If you are 70½ or older, a qualified charitable distribution from an IRA can satisfy giving goals without adding to taxable income.
7. Check your estimated payments
The fourth-quarter estimated payment for the year is due in mid-January. To avoid an underpayment penalty, most taxpayers need to pay in at least 100% of last year's tax, or 110% if prior-year adjusted gross income was above $150,000, or 90% of this year's tax, through withholding and estimates.
8. Mind the West Coast rules
State rules can change the math considerably:
- Oregon has one of the highest state income tax rates in the country, and many Portland-area households also owe Metro and Multnomah County personal income taxes.
- Washington has no wage income tax, but it has a capital gains tax on certain long-term gains and its own estate tax.
- California has high marginal rates, strict residency rules and an elective pass-through entity tax that can help business owners.
- Idaho has a flat-rate income tax, which matters for anyone relocating from a higher-tax state.
- Commuting across the Columbia River? Oregon generally taxes Oregon-source wages even if you live in Vancouver or Camas.
The bottom line
None of these moves works in isolation. A Roth conversion changes your bracket, which changes the value of harvesting gains, which changes your estimated payments. That's why we start every year-end review with a projection, and why the best time to plan is before the year is over.
This article is general information, not tax, legal or investment advice for your situation. Rules and thresholds change, so please talk with a qualified advisor before acting.
