As the calendar year nears its close, the end of December becomes a critical time for financial planning. December 31 marks the end of the tax year, affecting everything from retirement contributions to capital gains tax obligations. It’s also an ideal moment to assess your finances and make any adjustments needed to stay on track with your goals. When you start seeing holiday decorations in stores, think of it as a prompt to connect with your financial advisor and make any necessary financial moves before the year ends.
One important consideration is whether to accelerate or defer income. Financial experts often advise consulting with a professional to decide which approach will best suit your current and future tax situations. Deferring income can be beneficial if you’re currently in a high tax bracket but expect to be in a lower one later—such as in retirement. This strategy reduces your tax burden now and potentially lowers it in the future. Deferred compensation plans, like pensions, 401(k)s, or stock options, allow employees to contribute part of their income on a pretax basis, with taxes applied when funds are withdrawn during retirement. In some cases, accelerating income may be better, especially if your current taxable income is unusually low. A Roth conversion, for instance, allows you to move pretax assets into an after-tax Roth account, paying taxes now to enjoy tax-free qualified withdrawals in the future.
Minimizing capital gains tax liability is another area to consider before the year ends. Financial advisors can estimate this liability and suggest strategies to offset it, such as realizing losses to counterbalance gains. Losses can be used to offset up to $3,000 in gains annually, with any additional losses carried forward to offset future gains. This can lead to a broader conversation about tax-efficient investing, especially if frequent trading has generated significant short-term capital gains, which are taxed at a higher rate than long-term gains. Shifting to a strategy focused on tax efficiency could help alleviate a high tax burden.
These financial planning strategies highlight the value of reviewing your financial goals and adjusting your approach at year-end. Engaging in discussions about income timing, capital gains, and investment strategies with your financial advisor can help you better manage your tax liability and set yourself up for a stronger financial future. Taking proactive steps now can provide both immediate tax savings and long-term financial benefits, creating a more stable foundation for the years ahead.
