So who doesn't want to know about ways that can help with your taxes? Unless of course you are feeling very patriotic and just love paying taxes! Let's go over a few ideas you may be able to use if you have high income.
It goes without saying you should have a financial team behind you. For example, a fiduciary only CFP, a CPA, and an attorney. We can help you - especially when you run into more complex situations - which will happen when you have wealth.
Tax-Focused Investment Strategies
Once you have the right team who understands your financial situation, you can explore strategies that can help you with your taxes.
Backdoor Roth IRA
If you have high income that is above the IRS income limit for Roth IRA contributions, you still have the option to create a backdoor Roth IRA. This option allows high income earners to bypass the income limits and still participate in the tax advantages of a Roth IRA account. You just have to use the back door!
For a backdoor Roth IRA, you’ll need to:
Open and contribute to a traditional IRA (if your income is too high to get a tax deduction, this is a non-deductible contribution).
Convert your traditional IRA to a Roth IRA account (your IRA custodian can usually get you through this).
Be aware: if you have any other traditional IRAs, SEP or Simple IRAs, you may have to pay some tax on those under the pro-rata aggregation rule. If it becomes too complicated, consult with one of your financial team members - your CFP or CPA.
A backdoor Roth IRA can be beneficial if your income level is above the ceiling limit set by the IRS. Additionally, it’s important to remember that Roth IRAs do not have required minimum withdrawals (RMDs), only traditional IRAs do. This can be a nice benefit down the road. When considering a backdoor IRA, evaluate the tax obligations you might pay today vs the tax benefits you may realize toward retirement.
Super-Size It! Mega-Back Door Roth
Just about everybody knows you can max out your 401K with a decent amount of salary ($20,500 for 2022, $27,000 if age 50 or older).
What most people don't know - is that some 401k's have a unique feature that may allow you to make after tax contributions to your 401k above the $20,500. These after tax contributions can then be converted to a Roth option in plan. Potentially giving you larger and more amounts of tax-free growth and tax-free income later, hence Mega Backdoor Roth. If you have high income and your employer plan allows this - it's a no brainer!
Five Star Tip: your employer must allow this, and be sure to talk to a financial planner who knows how it works (hint, wink) before trying to set this up on your own. It's not necessarily plug and play. It's easier to avoid a mistake than it is to fix one! This why you should have your team in place.
Prudent financial moves can help you manage your taxable income and taxable estate. For instance, if you’re making a charitable gift, you can give appreciated securities that you have held for at least a year. There's a potential tax deduction for the fair market value of the stock in the year of donation, and the charity may be able to sell the stock later without triggering capital gains tax.
These ideas are for informational purposes only, so make sure to consult your financial, tax, and legal professionals before applying these to your specific gifting strategy.
The annual gift tax exclusion gives you a way to remove assets from your taxable estate. You may give up to $16,000 ($32,000 if you are married) to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption of $12.06 million for 2022.1 Managing through the annual gift tax exclusion can involve a complex set of tax rules and regulations. Before adjusting your strategy, consider working with a professional who is familiar with these rules and regulations.
Tax-loss harvesting involves taking capital losses (selling stocks worth less than what you first paid for them) against any capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change, and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can help you manage your tax liability.
Up to $3,000 of capital losses in excess of capital gains can be deducted annually from your income, and the remaining capital losses above that can be carried forward to offset future capital gains.2 Just remember, tax rules constantly change, and there is no guarantee that the capital gains and loss rules will remain the same in the coming years.
By taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your cap gains next year. Before making a trade in a non-retirement portfolio, it’s important to understand the gains or losses - and time frame of all your positions.
If you’re thinking about using this strategy, get familiar with the IRS “wash-sale rule.” This rule states that investors can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale.2
Because you have higher income, some things may not available to you - like a tax deductible IRA, and the ability to make a normal contribution to a Roth IRA.
These strategies may be available for you to consider which might help you with your taxes now and in the future. If you would like more guidance, please reach out by using my email below!
John Piershale, CFP®, AEP®
John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.