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Strategic tax planning can save a significant amount of money, but many options must be implemented before December 31. This year brought major changes to the tax law, adding both complexity and opportunities for smart planning. Key changes include adjustments to estate tax exemption amounts, qualified small business stock (QSBS) exemptions, and an increase in the state and local tax (SALT) deduction.

Keep in mind that reducing taxes is only part of the equation and not a goal in and of itself. It wouldn’t make sense to invest in a poor investment solely for its tax benefits. Likewise, it wouldn’t be wise to lock your money into a trust structure if you need it for other purposes, no matter how much tax it might save.

Ultimately, what matters is your net return after taxes and your ability to use your money for the goals that matter most to you. Sometimes, taxes are simply the price of success, and success is worth the tax bite.

With that in mind, here are some important tax planning strategies that may benefit you, depending on your situation:
 

Roth Conversions

Roth conversions are most advantageous in a low-income year or the year following a liquidity event (e.g., selling a company, realizing a large capital gain, exercising stock options). The strategy works because your tax rate is lower than usual, allowing you to convert at a reduced rate.

However, many people overlook the biggest benefit of Roth conversions: the ability to move more money into a tax-free structure. Normally, there are strict limits on Roth contributions. But if you’ve accumulated a large traditional IRA or 401(k) and also have substantial taxable assets, you can use taxable assets to pay the conversion tax, rather than using funds from the IRA or 401(k. This creates an indirect way to contribute significantly to a Roth.

Example:
Suppose you have $1 million in an IRA or 401(k) and want to convert it to a Roth. If your tax rate is 37%, you would typically pay the tax from the converted amount, leaving you with $630,000 in the Roth. But if you pay the tax from separate taxable assets, you retain the full $1 million in the Roth. Effectively, you’ve converted $370,000 of taxable money into Roth money: a substantial indirect contribution.
 

Tax Loss Harvesting

Many investors struggle to realize losses due to “mental accounting,” the tendency to view unrealized losses as not yet real. “It might come back,” they say.

Even if you believe a position might recover, there are immediate benefits to realizing the loss. It can offset other capital gains and up to $3,000 of ordinary income. You can always repurchase the same security after 30 days, once the wash-sale rule expires.

Beyond tax benefits, selling losses is a good discipline. As the saying goes on Wall Street: “Don’t throw good money after bad.” While there are exceptions, many losing investments continue to underperform. Redeploying your capital into better opportunities may be the wiser move, taxes aside.
 

Tax Loss Harvesting on Steroids

You can design a strategy that combines sound investment principles with aggressive tax loss harvesting. Two main approaches are:

1. Diversified Portfolio of Individual Stocks. You select stocks based on opportunity, risk, and alignment with your goals. Even if the overall portfolio performs well, some stocks will lose value. You can actively harvest these losses to generate significant tax savings.
2. Direct Indexing Strategy. Instead of selecting individual stocks, you own a broad sample of stocks that replicate an index. Like active management, some stocks will gain, others will lose. You can automate loss harvesting and typically accumulate substantial realized losses in the first year or two, even as the portfolio tracks the index. The downside of this approach is that fees are typically higher than just purchasing an index fund, so you want to make sure the tax benefits are greater than the extra fees.

Both strategies offer more tax loss harvesting opportunities than traditional funds. With funds, you can only harvest losses if the entire fund is down. With individual stocks, even if the overall portfolio is up, there are often meaningful opportunities to harvest losses.
 

Charitable Giving Options

If you regularly donate or are charitably inclined, there are several ways to maximize tax benefits. Two popular options are:

1. Qualified Charitable Distributions (QCDs). You can donate up to $108,000 annually from your IRA to charity without paying tax on the withdrawal. This is ideal if you’re already planning to give and want the most tax-efficient method. It’s also useful if you must take Required Minimum Distributions but don’t need the income and prefer charities to benefit instead of the IRS.
2. Donor-Advised Funds (DAFs). DAFs allow you to set aside money for charity and receive the tax deduction now, while distributing the funds over time. The DAF acts as a charitable entity, holding the money until you recommend which charities should receive it.

DAFs are especially useful in high-income years—such as receiving a large bonus, exercising executive compensation, or selling a business. In such years, your tax rate may be at its peak, so front-loading future charitable contributions can yield a larger deduction. You can then decide later which charities to support.
 

Long-Term Solutions

Various trust structures can substantially reduce taxes. Even if your net worth is currently below the estate tax threshold, it could grow significantly over the next 30-40 years. Thoughtful trust and estate planning can shift future growth out of your estate, avoiding the 40% estate tax at death.

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