Tax planning ideas to consider before year end

Tyler Kert
Tamarack Wealth Management

Most people aren’t thinking about taxes in December, unless it’s the tax they’re spending on Christmas gifts or airline tickets. But while December is a great month for gift giving and spending time with friends and family, it’s also your last month to ease your tax burden in 2025. On things like IRA contributions, the IRS is flexible and gives you time to make contributions after the year end. However, there are several other tax-saving options that end on December 31st. Here are a few to consider to make sure you’re setting yourself up for success when you file your return. 

Roth Conversions

Unlike IRA contributions which can be delayed until you file your return in 2025, Roth conversions must occur in the year you want the taxes to apply. So why might you consider doing a Roth conversion?

Converting a traditional IRA to a Roth IRA means you’ll pay taxes on the converted amount now, but all future growth and withdrawals in retirement will be tax-free. If you think you will be in a higher tax bracket later or in retirement, you should definitely consider doing a Roth conversion because it locks in your current tax rate. A Roth conversion can also provide flexibility in retirement planning because of its tax-exempt status. 

Year-end is a prime time to consider conversions, because you generally understand what your income is going to look like. That said, it is critical that you take into account your income and tax situation before you decide to do a Roth conversion. As a CPA, I’ve had conversations with clients who have been advised to do Roth conversions by their financial advisor when it clearly doesn’t make sense from a tax standpoint. Yes, a Roth is a powerful retirement tool and you don’t have to take RMDs, but that doesn’t mean that you should convert your money at a higher tax rate now, when you could defer the taxes into retirement when you will pay a lower rate. 

Consider doing a Roth conversion if you’re having a low-income year. But definitely consult with your tax advisor before doing so to make sure you won’t be paying extra tax on the conversion without realizing it. Once you convert IRA funds, there is no going back.

Harvest Investment Losses

Another strategy that you can implement in 2024 to lower your tax burden in 2025 is loss harvesting. It sounds like farming, but really it’s just an investing term that means selling your investment after it has gone down in value. Now, I know that doesn’t sound like the way investing is supposed to work. You’re right. You’re supposed to buy low and sell high. But inevitably, even the best investors face market corrections and are left with positions that are worth less than they originally paid for them. To illustrate this strategy, I’ll use an example:

Let’s say that you had a brilliant idea and bought zoom stock early in 2020 at $100/share when the coronavirus was just starting to emerge. One year later, you are confirmed as a genius because your investment is worth over 4 times what you paid for it. Do you sell and take your winnings? No! You’re convinced it’s going to keep going up. Well unfortunately, the tide turns and another year later your investment is back to $100/share again. A few more months, and your investment has declined in value nearly 30%. Fast forward to today - you’re still holding zoom stock at a loss and the recovery is slow. What can you do? Sell the zoom stock and the loss will offset against other capital gains that you had in 2024. You can even use the loss to offset your ordinary income up to a limit of $3,000 per year. Any remaining losses will carry over and offset future gains and ordinary income. 

Then, after you sell, you just need to wait 30 days to avoid a wash sale, and you can buy back the zoom stock if you would like. Markets can fluctuate a lot in 30 days, but it is not uncommon for investors to take losses, reduce their tax liability, and then jump right back into the same investing positions they were in 30 days prior.

Roth conversions and harvesting losses are two powerful strategies that can benefit you immensely if used correctly. Consult your tax advisor to ensure that a Roth conversion is in your best interest. If your financial planner hasn’t talked with you about tax-loss harvesting, you may consider asking them about that also. Both strategies can keep more money in your pocket in the long-term. Remember, it’s not what you make that matters, it’s what you keep.

This material is for informational purposes only and does not constitute financial, investment, or tax advice. Please consult your tax advisor or financial planner to discuss your specific circumstances before making any decisions.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.