Essential Tax Strategies Your Financial Advisor May Recommend


We’re nearing the end of another tax year — and that means it’s time to think about money moves that’ll lower your tax liability. The tax opportunities available to you hinge on the structure of your finances, especially your appreciating assets and income.

This is why your financial advisor should be a critical resource in your tax planning. After all, your advisor knows your finances, inside and out.

Even if you’ve never talked taxes with your advisor before, reach out and ask for a tax-planning conversation. Many will either accept gladly or recommend bringing another tax specialist — usually a colleague — into your advisement team. Either way, you’re likely to get some personalized tax advice.

As prep for those conversations, here are introductions to eight tax-planning strategies to discuss with your financial or tax advisor:

8 Tax-Saving Strategies to Discuss with Your Advisor

1. Tax-loss Harvesting

Tax-loss harvesting is a strategy to lower your capital gains tax. Capital gains are taxable at a rate that’s dependent on your income and how long you held the investment. When you sell an investment profitably after owning it for 12 months or more, the long-term capital gains tax rates apply. These range from 0% to 20%.

If your holding period on the investment was less than 12 months, you’ll pay your ordinary income tax rate — which runs as high as 37%.

To harvest tax losses, you strategically sell investments at a loss to offset taxable gains. Say you realized a gain earlier in the year of $6,000. In another position, you have an unrealized loss of $7,500. You may choose to sell the second position and realize the loss — essentially to sidestep taxes on the $6,000 gain.

If your losses are more than your gains, you can use the overage to offset up to $3,000 of ordinary income per year. Any remaining losses after that can be carried forward and used in the future.

Tax-loss harvesting sounds simple, but there are pitfalls to discuss with your advisor. For one, you must avoid triggering a wash sale. A wash sale is when you realize a loss and then repurchase the same investment within 30 days. In that scenario, you can’t use the realized loss against your gains.

Secondly, trading to lower your tax bill in one year may be counterproductive long-term — particularly if you plan on reinvesting in the assets you sold.

2. Tax-gain Harvesting

Tax-gain harvesting is the strategic selling of investments at a profit when your tax rate is temporarily lower. The strategy is most appealing for single filers who will earn less than $41,675 this year and married filers who will earn less than $83,350. Below these income thresholds, you pay 0% tax on your realized long-term capital gains. Above those earnings thresholds, you’ll pay 15% or more.


Say you took time away from work this year and your income is significantly lower than normal. As a result, you qualify for the 0% rate on your long-term capital gains. To harvest your gains, you’d realize them this year, rather than waiting for a higher tax rate next year.

Note that the gains add to your income. So the amount of gains you can take at 0% depends on how far below the income thresholds you are.

You can also repurchase the assets you sold profitably. This would raise your cost basis on those assets, which can reduce your future tax liability as well.

3. Roth IRA Conversion

A Roth IRA conversion moves pretax money held in a traditional IRA or 401(k) into an after-tax Roth IRA. You will pay taxes on the converted funds — but future qualified withdrawals from the Roth IRA will be tax-free.

This strategy makes sense when you expect to be in a higher marginal tax bracket later. You are essentially prepaying taxes now at a lower rate, in lieu of paying a higher future tax rate.

Roth IRAs have another advantage beyond tax-free withdrawals. They are not subject to required minimum distributions or RMDs. These are taxable withdrawals you must take from traditional IRAs and 401(k)s when you are 72 and older. Without RMDs, you have the option to leave your Roth funds in your account for distribution to your heirs after you’re gone.

Roth IRA conversions have one notable disadvantage: The amount you convert raises your adjusted gross income for the year. You’ll pay higher taxes of course, but there could be other repercussions. The higher income might raise your Medicare premiums and the taxable percentage of your Social Security income.

4. Accumulate Deductions

If you’re under 65, your standard deduction is $12,950 for single filers and $25,900 for married filers. Those numbers are high enough that itemizing deductions every year may not be an option. But with some planning, you might accumulate enough deductions to itemize every second or third year.

Two itemized deductions to focus on are charitable contributions and medical expenses. You can deduct up to 60% of your adjusted gross income for cash contributions to a public charity. You can also deduct un-reimbursed medical expenses that exceed 7.5% of your adjusted gross income.

To accumulate your deductions, you’d choose one year to group these costs. If you want to itemize and reduce your taxes this year, you’d make a large donation and schedule your priciest medical procedures. Next year, you might skip or reduce your donations and delay any optional treatments.

5. Maximize Retirement Contributions

If you’re still working, you can reduce your tax bill by maximizing contributions to your tax-advantaged retirement accounts. The contributions you make to traditional IRAs, traditional 401(k)s, and HSAs are pretax — meaning they reduce your taxable income. The tax savings you realize is your total contributions for the year multiplied by your marginal tax rate.

In 2022, you can contribute up to $6,000 cumulatively to traditional and Roth IRA accounts, or $7,000 if you’re 50 or older. The 401(k) contribution limit is $20,500 or $27,000 if you’re 50 or older. Note that your IRA contributions may not be tax-deductible if you’re also contributing to a 401(k).

The maximum allowed contributions to an HSA in 2022 are $3,650 if you have individual health coverage and $7,300 if you have family health coverage.

6. Qualified Charitable Distribution

A qualified charitable distribution or QCD is a direct transfer of funds from your IRA to a qualified charity. QCDs are also called IRA charitable rollovers. These are tax-free and can count towards your required minimum distributions, which would otherwise be taxable.

If you are older than 70 1/2, you can make up to $100,000 in QCDs annually. Since the amount of the QCD is not included in your adjusted gross income, you may realize other benefits associated with lower income, such as lower Medicare premiums.

7. Buy-and-hold Investing

Buy-and-hold investing is the practice of investing in stocks you intend to hold indefinitely. This strategy is tax-efficient because it minimizes your realized capital gains. You will likely accumulate large unrealized gains, but these are not taxable. The caveat is that you must choose stocks that don’t pay dividends.

Buy-and-hold investing has more of a tax deferral impact. You will eventually want to liquidate some of your assets. At that point, you’ll incur taxes on your capital gains. The good news is, you’re likely to pay only the lower long-term capital gains rates.

8. Tax-exempt Municipal Bonds

Municipal bonds are debt instruments issued by state or local governments. Many are exempt from federal income tax. Municipal bonds issued by your home state are usually also exempt from state tax.

The trade-off for the tax perks of municipal bonds is a lower interest rate than what you’d earn on, say, corporate bonds. Still, the net, after-tax difference will be less, possibly even negligible. Generally, tax-free bonds are most appealing to high-income investors who have a high marginal tax rate.

Lean on Your Advisors

Tax law is complicated — which means any tax strategy you consider will have a nuanced list of pros and cons. Lean on expert advice from your financial or tax advisor to understand how those nuances will play out on your tax bill and in your long-term financial plan.


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