Wealth Management: Tax Technique

Tax planning after the One Big Beautiful Bill

This year’s tax bill — the One Big Beautiful Bil Act (OBBA) — cemented many provisions first introduced in the 2017 Tax Cuts and Jobs Act (TCJA). It also added new and temporary tax breaks for Americans. Following are simple tax planning techniques:

Review tax-loss harvesting opportunities

Tax-loss harvesting involves selling investments that have declined in value, realizing those losses, then reinvesting in similar securities. The losses realized can be used to offset capital gains and, if applicable, up to $3,000 of ordinary income each year.

Losses are rare this year in a well-managed stock portfolio. However, investors may still have unrealized losses in their bond portfolios following the Fed’s rapid interest rate campaign after COVID. Investors should review their taxable accounts for any unrealized losses before year-end.

Optimize asset location

Asset allocation is where an investor decides how to divide their money between stocks, bonds, cash and other investments. That mix ultimately defines the risk and return profile for a given profile.

The next step is asset location. This involves placing investments in accounts where they will receive the most favorable tax treatment. Different assets generate different types of taxable income: bonds pay interest, stocks may produce dividends, REITs distribute income regularly, and mutual funds often realize annual capital gains. How those earnings are taxed depends on where the assets are held.

Investors should coordinate their holdings with the appropriate account type. It’s generally prudent to hold high-tax assets, such as REITs and certain bonds, in IRAs and 401(k)s. Investors can then concentrate tax-efficient assets, like municipal bonds and certain growth stocks, in their taxable accounts.

Maximize contributions to tax-advantaged accounts

Tax-advantaged accounts include 401(k)s, IRAs, HSAs and others. Readers should first confirm whether they are utilizing their company benefit plans. Benefits packages change every year, and many forgo important tax savings opportunities without realizing it.

Readers should also maximize their contributions to these accounts wherever possible.

A less-publicized bill — the SECURE Act of 2022 — recently boosted the contribution (catch-up) limits for older workers. Individuals aged 50+ can contribute an additional $7,500 to their 401(k) plans beyond the ordinary limits. Moreover, workers aged 60 to 63 can contribute an extra $11,250 per year.

Evaluate Roth conversions

Roth conversions involve transferring funds from a tax-deferred retirement account, such as a Traditional IRA or 401(k) Plan, to a Roth IRA. Individuals owe income taxes on any amounts converted. However, future withdrawals from the Roth IRA are tax-free if certain conditions are met.

Someone with major one-time spending goals, such as a vacation home or a new car, can access large sums of money tax-free from a Roth IRA in retirement. Withdrawals from a Traditional IRA or 401(k) Plan are otherwise fully taxable. Roth IRAs even allow tax-free withdrawals for heirs.

The Big Beautiful Bill solidified our current tax rates for the foreseeable future. Many are choosing that pay their taxes now to benefit from today’s historically low rates.

Consider charitable contributions

Charitable contributions can be deducted against your taxable income for the current year. These deductions are particularly beneficial for high earners.

Charitable deduction limits depend upon the charity classification, gift type and income level for the taxpayer. Unused deductions can generally be carried forward for up to five years.

The Big Beautiful Bill’s key extensions, updates and provisions are as follows:

Bonus Depreciation: The bill permanently restored a provision allowing business-owners to deduct 100% of the cost of new or used assets. However, assets must have been purchased and put in service on or after January 19, 2025. The provision applies to tangible assets, including heavy machinery, vehicles, office equipment and even computer software.

Deduction for Tips: A temporary deduction for up to $25,000 of qualified tips is available for food servers, entertainment workers and over 60 other tip-based occupations through 2028.

Deduction for Overtime Pay: A temporary deduction of $12,500 (single) or $25,000 (married filing jointly) is available for qualified overtime pay that exceeds an employee’s regular rate.

Deduction for Seniors: A deduction of $6,000 is available for individuals aged 65 and older (through 2028).

Deduction for Car Loan Interest: Up to $10,000 for loan interest relating to a new, U.S.-assembled personal vehicle.

Child Tax Credit: The credit is $2,200 per qualifying child — a slight increase from the $2,000 credit established in 2017.

SALT Cap Increase: The cap on the State and Local Tax (SALT) deduction was raised from $10,000 to $40,000 for most earners.

No one is certain what the future holds.

A disciplined plan allows you to focus on matters purely within your control.

Bryce Schuler, CFP, is a financial advisor with Baldwin & Clarke Advisory Services in Bedford.