Year End Strategies for High Income W2 Earners

Tis the season for checklists, so here are 20 financial planning strategies to consider if you’re interested in maximizing your financial health and/or improving your taxes by year end. Let’s get started:

1. Max Out Retirement Accounts

   • Contribute the maximum to your 401(k), 403(b), 457, or similar accounts to reduce your taxable income and boost retirement savings.

2. Contribute to a Backdoor Roth IRA

   • Make your Roth IRA or backdoor Roth IRA contributions before the tax deadline to benefit from tax-free growth and withdrawals in retirement.

3. Max Out Your Health Savings Account (HSA)

   • Contribute to an HSA to enjoy triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. If possible, let these funds grow without tapping into them.

4. Fund Your 529 Plan for State Tax Benefits

   • Contribute to a 529 plan to leverage state tax benefits while saving for future educational expenses.

5. Use Up Dependent Care FSA Funds

   • Spend your Dependent Care Flexible Spending Account (FSA) funds on qualified expenses to reduce taxable income.

6. Spend Remaining FSA Funds

   • If your FSA funds are “use-it-or-lose-it,” spend them before the year ends to maximize tax savings.

7. Tax Loss Harvesting

   • Sell underperforming investments to offset capital gains and reduce your taxable income.

8. Tax Gain Harvesting

   • Sell investments with a gain while in a lower tax bracket or to balance out harvested losses.

9. Review Your ESPP for Next Year

   • Assess your Employee Stock Purchase Plan (ESPP) options for the coming year to maximize potential benefits.

10. Consider Selling ESPP Shares Acquired in December

    • If locking in a discount on shares makes sense, consider selling any ESPP shares acquired in December.

11. Explore Roth Conversions

    • Converting traditional IRA funds to a Roth IRA may be beneficial for tax-free growth, especially if you’re in a lower tax bracket.

12. Exercise ISOs up to the AMT Threshold

    • Exercise Incentive Stock Options up to the Alternative Minimum Tax (AMT) threshold, or beyond if it aligns with your financial plan.

13. Consider Exercising NSOs

    • Evaluate exercising Non-Qualified Stock Options if it fits your financial strategy, but be mindful of its impact on your tax bracket.

14. Review Tax Withholding on Your Paycheck

    • Confirm that enough tax has been withheld from your paycheck to avoid surprises during tax season.

15. Maximize Mega Backdoor Roth (if available)

    • If your employer offers a Mega Backdoor Roth option, consider contributing additional funds for enhanced retirement savings.

16. Donate Cash to Charities

    • Making charitable donations can reduce your taxable income. Consider grouping donations, doing a qualified charitable distribution (QCD) from your IRA or using a donor-advised fund for added tax benefits.

17. Donate Appreciated Securities

    • Donating highly appreciated securities can help you avoid capital gains taxes and provide a charitable deduction.

18. Conduct a Cost Segregation Study

    • For property owners, a cost segregation study may provide significant tax savings through bonus depreciation.

19. Invest in a Qualified Opportunity Zone

    • Deferring large capital gains by investing in a Qualified Opportunity Zone can lead to significant tax advantages.

20. Prepay Property Taxes

    • Prepay property taxes to maximize the $10,000 deduction limit (if filing jointly), lowering your taxable income.

These strategies have the potential of making a big impact on your taxes and finances. Identify which ones work best for your situation, and act before year-end. Your future self will thank you!