Fall Tax Checkup: 3 Moves to Make Before December 31st

By Keith Brady, EA, Tax Advisory Manager

Many people consider February-April to be tax season, but the truth is, smart tax planning happens all year round! With the help of your financial and tax advisors, here are three strategic moves you may want to think about before year-end to optimize your taxes in the spring.

1. Lower Your Future Taxable Income with a Roth Conversion

If you are retired but have not yet reached age 73 (or 75 if you were born in 1960 or later), now might be the ideal time to start converting your Traditional IRA to a Roth IRA.

How it Works: Putting your money into a Traditional IRA is a great way to build wealth during your prime working years because contributions are pre-tax and can usually be deducted on your annual tax returns. This tax break helps grow your savings even faster once you turn 50 and are eligible to add an extra tax-deductible “catch-up” contribution on top.

However, when you reach your RMD age (73 or 75), the IRS requires you to take Required Minimum Distributions (RMDs): annual withdrawals from pre-tax accounts, such as your Traditional IRA, which count as taxable income.

For the average person who retires in their 60s, there is a golden window of opportunity after retirement, and before RMDs kick in, to start converting Traditional IRA dollars into a Roth IRA. Doing so will lower your RMD withdrawals when the time comes, decreasing your overall taxable income so you can avoid jumping into higher tax brackets.

Long-term Benefits: Money transferred from a Traditional IRA to a Roth IRA is treated as taxable income in the year it is converted, requiring ordinary income tax to be paid today. However, in exchange for paying tax now, all future growth and qualified withdrawals from the Roth IRA are 100% tax-free. This creates powerful future tax diversification, allowing you to draw from both taxable and tax-free buckets in retirement.

2. Turn Losses into Savings with Tax Loss Harvesting

When managing cash flow in your later working years or into retirement, it is common for pensions, portfolio interest and dividends, and even mandatory RMD withdrawals to create fluctuations in yearly income. Your advisor can help trim that taxable income by turning paper (or “unrealized”) losses in your brokerage account into actual losses to help offset the overall tax impact. This is called “tax loss harvesting.”

How it Works: Typically, when an investment is worth less than what you paid for it, those losses would only impact your investment portfolio. However, if the investments are sold at the right time while they are low, these (now “realized”) losses can be used to offset your taxable income during that year.

Tax loss harvesting becomes a particularly effective strategy when advisors realize losses on short-term investments, because their capital losses offset short-term capital gains, which are taxed at higher rates. Any net loss left over, after all capital gains are accounted for, can reduce up to $3,000 of other current sources of income, such as pension income, social security income, retirement account income, and even wage income. On the other hand, long-term capital losses are first netted against long-term capital gains, so coordinating how gains and losses net out in the big picture will depend on what has occurred in the client’s portfolio over the course of the year.

Long-Term Benefits: Tax loss harvesting is about more than just lowering your income tax bracket. Crossing certain income thresholds can expose a retiree to higher taxation on Social Security benefits, or trigger income-related monthly adjustments to Medicare Premiums. When we take into account the impact that all sources of income can have on specific tax credits eligibility, deduction phaseouts, and more, offsetting gains or lowering overall taxable income through planned loss harvesting becomes an even more valuable dial for an advisor to turn to create a buffer against cascading circumstances.

3. Avoid Excessive Year-End Penalties with Estimated Payments

One common misconception is that taxes are settled in one yearly lump sum – when in reality, the IRS operates under a strict “pay as you go” system. As income shifts throughout the year, many taxpayers overlook how these fluctuations will affect their total tax liability come April 15th.

For standard earners, tax liability is typically satisfied through automatic withholding on wage salaries, Social Security benefits, pension payments, or retirement account distributions. However, for taxpayers with multiple or varied income sources, your advisory team can help proactively review your current income alongside projected investment earnings (such as interest, capital gains, and dividends) to determine if estimated payments will help prevent unexpected tax bills and avoid costly underpayment penalties.

How it Works: Making timely estimated tax payments helps protect you against timing-related penalties. Under the IRS Safe Harbor rule, you can avoid most underpayment penalties if your total payments equal at least 90% of your current year’s tax liability or 100% of your prior year’s liability (whichever is smaller), with the prior-year threshold increasing to 110% for high-income earners.

Consider this example: Sara is self-employed. Last year her tax liability was $20,000, and this year her advisor projects her tax liability will reach $30,000.

To calculate her Safe Harbor target, she compares both benchmarks:

90% of current year’s tax = $27,000

100% of prior year’s tax = $20,000

Projected Safe Harbor Target = $20,000

Because $20,000 is the smaller amount, paying $20,000 across four quarterly estimated installments satisfies the Safe Harbor requirement and protects Sara from penalties.

To see what happens when payments fall short, suppose Sara pays only $18,000 during the year:

Actual Tax Liability: $30,000 | Required Safe Harbor Payment: $20,000

Taxes Paid: $18,000 ($2,000 short of the Safe Harbor requirement)

Outcome: $12,000 balance due at filing, plus IRS underpayment penalties calculated on both the underpaid amount and the duration of the shortfall.

Estimated payments are particularly valuable for self-employed individuals, taxpayers with rental income or side businesses, and those navigating other situations where taxes are not automatically withheld. While meeting the Safe Harbor rule eliminates most underpayment penalties, it is important to remember that it does not eliminate the underlying tax balance owed when filing.

Reaching out to your tax advisor in the fall to inform them of major income changes during the year ensures adequate time to adjust strategy, arrange required payments, and avoid tax-season surprises. Ideally, this would be a year-long process as late estimated payments don’t erase earlier-quarter penalties, but some conversations later in the year about changes to your income are much better than no conversation, and a springtime tax bill surprise.

Proactive Planning for a Stress-Free Tax Season

As the seasons change and perhaps start to mirror your own life changes, it’s a reminder that checking in with your tax advisor to review any major shifts along the way is always a good practice. Using some of the guidelines in this article, you and your advisor can enjoy being more proactive during a window of time when it really counts.

Let the annual fall harvest act as a nice parallel so you can reap the benefits come tax time in the spring!