9 Tax-Saving Strategies for Year-End 2023: Advisors' Advice

2. Manage investment gains and losses.

For mutual funds, review the estimated capital gains distributions. Even if you personally do not have a gain, the fund may be passing sizable capital gains and interest payments to holders of the fund at or near year-end. Funds typically publish this information so you can estimate your tax liability from these distributions vs selling the fund before the distribution date.

Take a look at your taxable investments for potential tax loss harvesting. Your bond funds may be a great place to look for losses this year.

3. Convert mutual fund holdings to ETF shares.

One tax-management recommendation we give to new clients using Vanguard is to convert their mutual funds that are held in joint or individual brokerage accounts to an equivalent exchange-traded fund (ETF). This conversion can be done by Vanguard on many of their mutual funds because of their patented construction that has ETFs as a share class.

The ETF share classes often have lower expense ratios and can have limited to no annual capital gains distributed, unlike a mutual fund — because of the way ETFs can use the creation and redemption process, which can avoid realizing capital gains in the fund.

There is a timing component as most funds distribute some capital gains each year in late November or December, but not all funds have distributions nor can all be converted.

The client does not need to worry about wash sale because it isn't a sale; conversions are allowed from both Investor and Admiral Shares and are tax-free if they own the mutual fund and ETF Shares through Vanguard. You cannot go from ETF to mutual fund though — that would be a sale.

4. Consider a charitable stock donation or QCD.

For charitably minded families, donating appreciated stock to a donor-advised fund can reduce your current tax bill and provide the opportunity to support causes important to you. If you're required to take distributions from your retirement account, you can elect to donate that money with a qualified charitable distribution to avoid paying income tax on your distribution.

5. Take action on capital gains distributions.

Tax planning can be challenging, especially when it comes to mutual fund distributions and their impact on taxable income. This information is usually not available from custodians like Vanguard or Schwab until November or early December. Once we have this information, we can calculate the expected capital gain distribution amounts for each client's tax projection.

This allows us to make informed decisions about tax moves that can be made before the end of the year. One common move is to harvest more losses in taxable accounts to balance out the capital gain distribution income.

Additionally, clients can select a fund with a large expected capital gain distribution as a good candidate for contribution to a donor-advised fund or qualified charity. This strategy has a double benefit in that it avoids the capital gain and provides the client with a charitable deduction that can offset their ordinary income on their tax return.

6. Take a longer view.

Toward the end of the year, we identify areas where taxes can be reduced over a client’s lifetime. Examples of items we address:

Tax brackets — Will the client be in a higher or lower tax bracket this year versus future years?

If you think you'll be in a higher tax bracket in the future you might do a Roth IRA conversion, or if you're younger you might make a Roth contribution to an IRA or 401(k) plan.

If you think you'll be in a lower tax bracket in the future you might minimize income where possible, such as making as big a regular IRA or 401(k) contribution as possible.

Medicare IRMAA (Income-Related Monthly Adjustment Amount) Surcharge — Keeping an eye on the level of income that results in higher Medicare premiums.

Underpayment penalties — Making sure the client has withholding or estimated tax payments to avoid penalties.

7. Consider muni bonds for wealthier clients.

One often overlooked move a high-income individual can make is utilizing the tax advantages of investing in municipal bonds. Yields are increasing on bonds across the table between taxable bonds and tax-free municipals.

If someone's year-end taxable income is pushing them into higher tax brackets, it could make sense to reposition their taxable bond portfolio into tax-free municipals heading into 2024 if their income is expected to stay in that tax bracket moving forward.

8. Move to a More Tax-Efficient Fund

Many mutual funds will pass along gains the fund realized throughout the year in December. What some investors don't realize is there is a possibility that they have a loss during the year but still have to pay capital gains taxes.

In some cases, especially inheritance, there can be a better tax advantage to selling the fund before the gains are distributed. Keep in mind this only applies to taxable — non-retirement — accounts.

Another strategy for tax-sensitive investors with a low cost basis is not reinvesting the capital gains distributions but instead, directing them into a more tax-efficient or tax-free fund, rather than continuing the cycle.

9. Use Roth conversions to fill up tax brackets.

Year-end is the best time to do tax planning. A few things we are considering with every client are Roth conversions and filling up lower tax brackets, donating highly appreciated securities to donor-advised funds, and making sure we fill up retirement accounts to the max if we have the extra dollars.

The benefit of Roth conversions is filling up their tax bracket now and moving to tax-free, versus waiting for the future where it may be taxed at a higher rate.

With donor-advised funds, you can donate highly appreciated securities and avoid the capital gain and get a deduction up to 30% of AGI (adjusted gross income).

Both super impactful.

For business owners, we consult on maximizing the qualified business income deduction by tinkering with salary and profit. The QBI deduction generally amounts to 20% of qualified business profits, until the owner's adjusted gross income reaches a threshold high enough that it becomes the lesser of 50% of the owner's W-2 wages or 20% of business profits.