1. Review Realized Gains & Income to Date

Understanding your earnings from work is usually straightforward, but tracking what’s happening in your investment portfolio can be more complex, especially for busy professionals. Ideally, it’s wise to monitor your portfolio throughout the year to stay on top of potential tax liabilities and determine if estimated taxes need to be paid. But I’m also a realist.

If you’re starting to focus on tax planning, ask your advisor for a report of realized gains and losses for your non-tax-deferred accounts and a breakdown of taxable income from your investments, like interest and dividends. No advisor? You can often generate these reports yourself or check your most recent statement for year-to-date activity. Here are some key points to consider:

Interest-Bearing Savings & Money Market Accounts

Many savings and money market accounts continue to offer higher interest rates than in previous years. Be sure to keep an eye on these accounts, as the interest earned is typically taxed at your ordinary income tax rate—not the lower, favorable rate applied to qualified dividends or long-term capital gains.

Actively Managed Accounts and Mutual Funds

Even if you didn’t sell any investments or request a sale in your account this year, you could still incur realized capital gains. In accounts managed by an advisor or invested in mutual funds, realized gains may occur due to active management decisions or other investors’ redemption requests in mutual funds.

Mutual funds often distribute capital gains toward the end of the year. As a fund owner, you can typically get a projection of these capital gains that will be passed on to you—separate from any gain or loss on the actual shares you hold if you decide to sell them.

Investment Income from Dividends and Interest

Investment income from holding assets in a non-tax-deferred account can often go unnoticed, especially when dividends or interest are reinvested. Reinvesting doesn’t exempt you from owing taxes on income earned that year, so it’s important to review these details!

By checking the taxable income from your portfolio, you can gauge whether you might be subject to the Net Investment Income Tax (NIIT). This 3.8% tax applies to net investment income for single filers with modified adjusted gross incomes over $200,000 ($250,000 for married couples filing jointly). The tax is calculated on the lesser of your net investment income or the portion of your modified adjusted gross income above these thresholds. This can be an unwelcome surprise in April, but there may still be time to reduce your net investment income before year-end.

2. Deep Review on Your Investment Portfolio

Did you find more realized income from your portfolio than anticipated? The good news is there’s still time to make adjustments. Request an unrealized gain/loss report from your advisor, or review your unrealized gains and losses in your non-retirement accounts online. Even if you’re satisfied with your realized gains, there may be long-term tax-saving opportunities to consider.

Look for positions with unrealized losses. Through tax-loss harvesting, you can sell investments that have declined, using the losses to offset gains elsewhere in your portfolio. The proceeds from these sales can then be reinvested in similar securities, allowing you to reduce your tax bill while maintaining your preferred asset allocation.

The inevitable caveat

There are some important restrictions to consider with this strategy. For instance, losses must be applied in order: long-term losses are used to offset long-term gains, while short-term losses offset short-term gains first. Additionally, the IRS enforces the ‘wash sale’ rule, meaning that losses can’t be claimed if you repurchase a ‘substantially identical’ security within 30 days before or after the sale, totaling a 61-day window.

Tax-loss rules can be complex and require careful planning to ensure eligibility. However, when used effectively, tax losses can offer long-term value since they can be carried forward indefinitely, providing a tax benefit until fully used.

3. Review Contributions Made to Tax-Deferred Accounts

If you’re looking to reduce your taxable income before year-end, navigating all available tax deductions can feel daunting. A straightforward first step is to focus on maximizing contributions to tax-deferred accounts, ensuring you’re taking full advantage of these opportunities.

Workplace Retirement Accounts

Making pre-tax contributions to your workplace retirement account is one of the most effective ways to lower your taxable income while building toward long-term goals. Check your retirement plan portal to review your contributions to date and projected contributions through year-end. There may still be time to increase your contributions without significantly impacting your cash flow as a high-income earner. These contributions often offer more impact than IRA contributions, which face strict deductibility limits for higher-income individuals.

Health Savings Accounts

A Health Savings Account (HSA) offers a unique way to reduce your current taxable income while building tax-free funds for current or future medical expenses. Although not everyone is eligible to contribute, those enrolled in a High Deductible Health Plan (see the contribution limits below) should ensure they’re maximizing this valuable opportunity!

529 Accounts

If you’re saving for a loved one’s future education and live in a state with income tax, contributing to your state’s 529 plan may provide valuable tax benefits. Deductibility of 529 contributions and deadlines for claiming deductions vary by state (most by December 31st), so check your state’s guidelines. Reducing your state income tax burden can be particularly useful given the federal limit on state and local tax deductions. Plus, 529 plans now offer even more tax-efficient, long-term wealth-building opportunities beyond education, thanks to updates in the Secure Act 2.0.

4. Look at Other Deductible Buckets

You don’t need to be a tax expert to recognize which expenses might help lower your taxable income or determine whether it makes sense to take specific actions before year-end. A quick review of the federal Schedule A can remind you of the deductions you’ve accumulated throughout the year, including charitable contributions and medical expenses. This will help you assess whether you have enough deductions to exceed the standard deduction amounts for 2024 ($14,600 for single filers and $29,200 for married couples filing jointly).

If you’re close to surpassing the standard deduction limit and have charitable intentions or other deductible expenses planned before year-end, you can take action before December 31st to maximize your deductions and further reduce your taxable income.

There are tax-efficient ways to donate to charitable organizations beyond simply writing a check:

• Donating appreciated shares of stock can eliminate potential future capital gains taxes on those assets.
• Establishing a Donor Advised Fund (DAF) allows you to secure a significant charitable deduction in high-income years (such as those with substantial stock-based compensation or capital gains) while distributing funds to your favorite charities over time.

Of course, these strategies should complement discussions with your team of advisors, including your wealth advisor and tax professional. Starting these conversations from a place of understanding your overall financial picture can be very beneficial.

5. Review Current Tax Credits Available

Many high-income earners often miss out on tax credits related to having children, covering childcare expenses, or pursuing higher education for themselves or their dependents. Additionally, income limits can make credits for electric vehicle (EV) purchases inaccessible. However, for those considering energy-efficiency upgrades to their homes, the Inflation Reduction Act of 2022 offers significant benefits.

This act extends the Residential Energy Efficient Property Credit, originally set to expire in 2024, to 2034 and renames it the Residential Clean Energy Credit. Homeowners can now qualify for a non-refundable credit for improvements such as installing heat pumps, energy-efficient exterior doors and windows, and insulation in their primary residences. While there are certain limitations and opportunities based on individual circumstances, consulting the IRS and your CPA can provide valuable guidance if you’re considering home upgrades.

As the year winds down, it’s important to understand the big picture when it comes to your taxable income. When viewed from a holistic perspective, it is possible to identify unique opportunities to lower your tax burden. High-income earners must also remain cognizant of timing when it comes to these opportunities, ensuring they’re prepared to take appropriate actions before the year ends.