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Key Takeaways

• The $3.5 trillion economic package may eliminate many tax planning strategies.
• The House proposed a bill that would repeal Roth IRA conversions for any single individuals earning more than $400,000.
• Defined Benefit plans allow small business owners to set aside more money for retirement than other traditional retirement plans and allow for the highest contributions to a qualified plan of $150,000 or more.

The $3.5 trillion tax and spending package may eliminate many tax planning strategies. One of the biggest uncertainties is when the tax changes will go into effect; it’s very likely that higher income taxes could be right around the corner. Now is a good time to consider year-end moves to lower next year’s tax bill. But be on high alert: Financial experts say taxpayers may need to shift gears after Congress votes on new tax policies. Here are four strategies to minimize taxes before the end of the year.

1. Write Off Investment Losses on Taxes

Tax filers may consider tax-loss harvesting, which means realizing your investment losses early. This allows taxpayers to offset capital gains with losses and push capital gains taxes into the future. Tax-loss harvesting is worth around 1% a year to investors. Tax-sheltered accounts such as a 401(k) or IRA won’t benefit from tax-loss harvesting because there are no capital gains taxes in the short term.

2. Convert to a Roth IRA

A Roth Individual Retirement Account (IRA) conversion can benefit individuals with large traditional IRA accounts who expect their future tax bills to stay at the same level or increase at the time they plan to start withdrawing from their tax-advantaged account – a Roth IRA allows for tax-free withdrawals of qualified plans. The House recently proposed a bill that would curb these Roth IRA conversions for high earners. If the law is passed, Roth IRA conversions would be repealed for any single individuals earning more than $400,000 or couples married filing jointly with income more than $450,000. This provision would apply in taxable years after December 31, 2031.

3. Open a Personal Defined Benefit Plan

A Defined Benefit plan is a type of retirement plan that is typically paid for by the employer. Defined Benefit contributions are tax deductible, and the investment gains are tax deferred. Defined Benefit plans allow small business owners to set aside more money for retirement than other traditional retirement plans – the plans allow for the highest contributions to a qualified plan that can be $150,000 or more.

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4. Consider Charitable Giving

The landscape for charitable giving has shifted in the past 18 months, and it’s unclear how charitable giving will be affected under a proposed bill. The standard deduction is $12,550 for single filers ($25,100 for couples filing together) in 2021. Further, it’s tougher to itemize and claim the write-off. But many filers combine multiple years of donations, known as “bunching,” to clear the standard deduction thresholds. Retirees age 70½ and older can donate to charity from their IRAs with a qualified charitable distribution, which is a direct payment from pre-tax IRAs that doesn’t count as taxable income.