Year-End Tax Planning: Tax Loss Harvesting & Charitable Giving

As the calendar year winds down, it’s time to begin thinking about smart financial moves you can make now that will reduce your 2024 tax burden while supporting your long term financial goals.  

As a high-income earner, you will likely need more than standard deductions when you file your tax return. This is where the services of a wealth management firm in Washington, D.C., like Brown|Miller can be a difference maker. 

Two popular tactics that we recommend to certain clients include: 

• Tax loss harvesting 
• Charitable giving strategies 

Year-End Tax Planning Strategy #1: Tax Loss Harvesting 

The goal is to take gains by selling appreciated assets in your portfolio and there may be opportunities to offset those capital gains with realized losses to reduce additional taxes. Tax-loss harvesting can be used to sell securities that declined in value after you bought them and use the losses to offset gains from the sale of appreciated assets. Even losers have additional value when the losses reduce your 2024 tax liabilities. 

Here is an example of how you can use tax loss harvesting:  

Suppose you’ve had a good year with your investments and made a profit of $50,000 from selling shares in one of your stocks. This profit is considered a short or long-term capital gain, depending on how long you held it, and you’ll owe taxes on it—typically at 15% or 20% for long-term gains, depending on your tax bracket, and possibly even higher for short-term gains.

Let’s say you have another stock in your portfolio that hasn’t performed well and currently has a $50,000 unrealized loss. By selling this underperforming stock, you “harvest” the $50,000 loss, which can be used to offset some or all of the loss for the  appreciated asset. 

Here’s how the math works: 

1. Capital Gain: $50,000 
2. Capital Loss from Tax Loss Harvesting: -$50,000 
3. Net Capital Gain: $50,000 – $50,000 = 0 

Instead of paying taxes on the full $50,000, you are not taxed because you offset the gain with a loss. This reduction translates into significant tax savings, especially for shorter holding periods and higher tax brackets.

Additionally, if you had more losses than gains, you could use up to $3,000 of the remaining loss to offset your ordinary income. Any losses beyond that $3,000 can be carried forward to future years, potentially giving you additional tax-saving opportunities. 

Our Washington, D.C. CFP® professionals specialize in creating tax-efficient investment strategies that apply tax-loss harvesting. Working with a financial advisor can also help you avoid pitfalls like the wash-sale rule and ensure that harvested losses  align with your long-term investment strategy. 

The wash-sale rule prohibits you from claiming a loss on a security if you buy the same or substantially identical security within 30 days before or after the sale. The IRS disallows the loss deduction if you repurchase the same security within this period. 

Year-End Tax Planning Strategy #2: Charitable Giving Strategies

Year-end is also an ideal time to review your charitable contribution strategy. With careful planning, giving to causes you care about can provide meaningful tax benefits while achieving your philanthropic goals. There are several charitable giving strategies, but two stand out. 

1. Qualified Charitable Distributions (QCDs) 

A Qualified Charitable Distribution (QCD) can be a smart tax-reduction move under the following circumstances: 

• If you’re over 70 1⁄2 and don’t need all of your Required Minimum Distribution (RMD), you can donate directly from your IRA to a charity, with the amount donated counting toward your RMD. 
• A Qualified Charitable Distribution can lower your taxable income since QCDs are excluded from adjusted gross income (AGI). Reducing your AGI can also have a positive ripple effect on other tax events, potentially lowering Medicare premiums or decreasing taxes on Social Security benefits.
• If giving to charity is already part of your plan, QCDs offer a tax-efficient way to make those donations. Unlike cash contributions, which only reduce taxable income if you itemize deductions, a QCD reduces taxable income directly without needing to itemize. This approach can benefit you if you take the standard deduction rather than itemizing, as you will still need to get a tax benefit from your charitable contributions.
• Keeping your AGI lower can also reduce exposure to the Net Investment Income Tax (NIIT) or avoid higher Medicare premiums, which are income-based. 
• If you have a substantial balance in your IRA account(s), QCDs can help manage RMDs over time without triggering higher taxes. If you’re in a higher tax bracket, every dollar saved in taxes can be significant, and using QCDs annually can help reduce the long-term tax impact of RMDs. 
• You can direct your IRA custodian to send funds directly to the charity. The distribution amount then bypasses your taxable income, lowering your adjusted gross income (AGI) and potentially reducing other income-based taxes and surcharges.
• Up to $105,000 per year can be given via QCDs. While this doesn’t provide an additional charitable deduction, reducing taxable income can be advantageous.

Watch our video on Qualified Charitable Contributions.

2. Donor-Advised Funds (DAFs) 

Another charitable giving strategy to consider is a Donor-Advised Fund (DAF) if you seek flexibility in distributing your wealth to various charitable organizations.

A DAF functions like a personal charitable fund: DAFs allow you to make a charitable contribution, receive an immediate tax deduction, and then produce grants from the fund to charities over time. 

• Since the standard deduction increased with the Tax Cuts and Jobs Act, it may be advantageous to “bunch” charitable contributions. This means grouping several years’ contributions into one year to exceed the standard deduction threshold. In high-giving years, you can itemize, then take the standard deduction in other years.

For instance, if you normally give $10,000 per year to charity, consider contributing $30,000 to a DAF in one year. You can then spread out your distributions over the next few years while maximizing your tax deduction in the contribution year. 

• DAFs offer the flexibility to separate the timing of the donation from the timing of grants to charities, making this approach a powerful tool for those with fluctuating income or large gains in a given year.

How Brown|Miller Can Help  

At Brown|Miller Wealth Management, we understand financial decisions are about more than reducing taxes—they’re about aligning your wealth with your interests, values, and plans.

Our team of Washington, D.C. financial planners is here to simplify the complexities of tax-efficient charitable giving, optimizing your approach while achieving your philanthropic goals. Our approach focuses on giving with impact by using tools like DAFs and QCDs to maximize the tax benefits and the fulfillment of supporting causes you care about. We can guide you on how to make the most of these year-end opportunities.

At Brown|Miller Wealth Management, we take a collaborative approach to wealth management. By working closely with you, we can craft a strategy that reflects your goals, aligns with your tax needs, and adds greater meaning to your financial plan.  

Connect with us today to discuss how we can assist with your year-end tax planning and charitable giving strategy, helping you turn today’s decisions into tomorrow’s legacy.

Disclaimer: This article is intended for informational purposes only, and not to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.

The information provided in this article represents the opinions of Brown Miller Wealth Management (“BMWM”) and is expressed as of the date hereof and is subject to change. BMWM assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by BMWM at any time without notice. The information may be based on third-party information, which is deemed reliable, but its accuracy and completeness cannot be guaranteed.

BMWM provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. BMWM is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites.

BMWM will act solely in its capacity as a registered investment advisor and does not provide any legal, accounting or tax advice. Client should seek the counsel of a qualified accountant and/or attorney when necessary. BMWM may assist clients with tax harvesting and we will work with a client’s tax specialist to answer any questions related to the client’s portfolio account. Any tax advice contained herein is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.