When you’re building out a financial plan you might consider things like monthly budgeting, retirement, estate planning, emergency funds, or long-term investments. But are you also incorporating tax strategies into your overall plan? Tax strategies, as we describe below, are methods that optimize your financial situation by reducing your overall taxes. Strategies can range from asset allocation in tax-deferred and taxable accounts to reducing taxes on capital gains. 

With the following tax strategies, you can build a better financial plan for yourself and hopefully keep more of your hard earned money for yourself.

Diversifying Your Taxation

With the uncertainty of U.S. policy, carefully made financial plans can change overnight because of new rules.  For example, the SECURE Act that was passed in 2019 updated the  minimum required distribution age from 70 ½ to 72 and removed the age cap for contributing to a traditional IRA (it used to be 70 ½).

Since it’s hard to guess how tax laws may change in the future, it’s best to diversify your future retirement taxation. This can be done by contributing pre-tax dollars into traditional IRA accounts, and post-tax dollars into Roth IRA accounts.  

At retirement, withdrawals from a Roth IRA can be taken tax-free because the contributions were made with your post-tax dollars. Traditional IRA accounts, on the other hand, will be taxed as ordinary income. Having different types of retirement accounts can allow you to determine how your income is taxed annually and give you more flexibility as you plan the sunset years of financial future. 

Charitable Contributions

For charitable contributions,  a financial plan can help dictate the various tax strategies available to you.  Even though the Tax Cuts and Jobs Act of 2018 increased the standard deduction amounts available to individual and married filers, there are still opportunities for tax savings.

For example, large charitable contributions can mean that your itemized deductions will be greater than the standard deduction taken. Talk with a financial advisor if you’re planning on making a large contribution, as you might want to consider making it at the end of the year so that you increase your itemized tax deduction.

Charitable contributions can also be used to avoid paying taxes on required minimum distributions (RMDs).  The IRS allows a direct transfer of funds made directly to a qualified charity to count towards your RMD.  Normally, RMD distributions from an IRA are taxed as ordinary income, but making a qualified charitable distribution allows you to avoid having to pay those taxes.  Note that the IRS will not let you claim the qualified charitable contribution as a tax deduction though, as that would be double dipping.

It’s important to plan your charitable distributions so that the timing and size of your charitable distributions can help you save on taxes.

Tax Loss Harvesting

Another way to leverage tax strategies is through tax loss harvesting.  Tax loss harvesting is the process of selling out of an investment currently in loss position. In some cases, the advisor will purposefully buy back a similar position in order to keep the portfolio allocation in line with the portfolio’s risk and return parameters.  Knowing when and where to deploy tax loss harvesting can be an important part of your financial plan.

This strategy is applicable during all market conditions, but it is especially useful during down market periods. This is because losses taken in prior years can be used to offset gains in future years. The IRS lets you carry forward excess realized losses and use them in two ways. One way is as an offset against ordinary income, however only $3,000 in your harvested losses may be used annually.  The second way is as an offset of future long-term realized gains. Either way, your harvested losses will allow you to reduce your overall tax liability.

If you’re receiving compensation through incentive stock options (ISOs) or non-qualified stock options (NSOs), this strategy can be particularly helpful since your options might generate large capital gains. In these cases, it is important to create a plan for when your stock should be  liquidated. 

Normally you’ll want to liquidate your ISOs or NSOs as long-term capital gains in order to avoid having to pay ordinary income tax rates. This means waiting at least two years from when the stock option was initially granted and holding the stock for at least one year.  With this plan in place, you can then harvest tax losses in other non-qualified accounts to offset any long-term realized gains generated by the sale of your company’s stock. 

Qualified Dividends

If you’re a retiree or individual that needs income, qualified dividends can be an effective strategy to reduce taxation as part of a financial plan.  According to the IRS, qualified dividends are dividends from a U.S company, or qualifying foreign company, that meet specific criteria, and that are held for at least 61 days of the ex-dividend date (i.e., the first date when an investor would no longer be entitled to the dividend). 

Qualified dividends are unique in that they are taxed at the same rates as long-term capital gains, meaning that the income can be taxed at 0%, 15%, or 20% depending on your tax bracket.  In 2022, this means that a married couple who received qualified dividends and had aggregate income of less than $80,800 would end up paying nothing in taxes on the dividends.  If you’re on a fixed pension, or social security, this is one of the tax strategies that might make sense in helping reduce the amount of taxes that are needed to be paid while still providing additional income.

There are multiple opportunities to utilize tax strategies when building a financial plan. And because market conditions and government policies can change, an annual review of your plan can help make sure you’re staying on track. If you are not currently working with a financial advisor or would like an advisor to analyze your current financial situation, connect with our team of qualified investment advisors for a no-obligation introductory meeting.


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Jared Ong

Jared Ong oversees portfolio management, trading and technology. He previously worked at the Capital Group as a business systems analyst where he was integral in improving the trade operations group’s equity, fixed income, and foreign exchange trade processes. A graduate from Brigham Young University, Jared holds a Bachelors in Music. In his spare time, he enjoys composing and arranging music.