6 Questions to Consider When Prepping for Tax Season (2024)

Please note: This content may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., among other provisions, the SECURE Act 2.0 will raise the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73, beginning in January 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0323-3N8G)

Please note: This content may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., among other provisions, the SECURE Act 2.0 will raise the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73, beginning in January 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0323-3N8G)

1. What are my withholdings and estimated tax payments?
2. Have I maximized my retirement account contributions?
3. Do I need to take RMDs?
4. What is the cost basis of my investments?
5. Are my investments tax-efficient?
6. Have I maximized my charitable contributions?

Double-check your withholding and estimated tax payments to ensure you're not over or under withholding from your paycheck.

Many people think getting a big tax refund is a good thing. Unfortunately, the IRS does not pay you interest on the refund it sends you. Having too much money withheld from your paycheck—or overpaying your quarterly estimated tax payments—means you're forgoing the potential interest or returns that money could have generated.

On the other hand, withholding too little can lead to a large bill at tax time, an unpleasant surprise if you haven't planned for it. Avoid both scenarios by checking that your withholding is appropriate.

If you're age 72 or older and have to take RMDs from your retirement accounts, you must do so before the end of the year. Otherwise, you may have to pay a 50% excise tax on the amount not distributed.

If you turned 72 this year, you have until April 1 of next year to take your first RMD. However, if you wait until next year to start your RMDs, you'll have two distributions in the same year—which might bump you into a higher marginal tax bracket.

If you're charitably inclined and don't need the RMD for your living expenses, consider making a qualified charitable distribution (QCD) from your IRA directly to your favorite charity. You can use a QCD to donate up to $100,000 a year and it won't be included in your income.

Know your costs before you sell. Savvy investors know thatmanaging their cost basis can help them save on taxes. Your cost basis is essentially what you paid for an investment, including brokerage fees and any other trading costs. Your capital gain (or loss) will be the difference between the cost basis of the asset and the price at which you sell it. In a simple transaction, the cost basis should be easy to calculate.

However, if you buy the same investment over time—such as through a dividend reinvestment plans—each block of shares purchased is likely to have a different cost and holding period. In these situations, you can pick which shares to sell, giving you the ability to sell the ones that will have the least tax impact.

Alternatively, you can go with the default method, which generally requires less effort on your part—but could cost you more in taxes.

The "first in, first out" (FIFO) cost basis method is Schwab's default method for determining which assets were sold, for all investments other than mutual funds, if you don't provide instructions to the contrary.

If you purchased 1,000 shares over a number of years and you sold 100 of those shares, the FIFO method assumes that the shares you sold were the first ones purchased (the oldest shares). Generally, the shares you've held the longest are the ones you purchased at the lowest cost, which means the FIFO method could result in the largest gain recognized and the highest tax obligation.

Make sure your assets are located in the most tax-efficient investment accounts. For example, it makes sense to hold long-term investments in a taxable account, because any gains will be taxed at the lower capital gains rate. The same is true for tax-efficient investments, such as stocks or funds that pay qualified dividends, municipal bonds, and most index funds and ETFs.

On the other hand, you're better off keeping investments you plan to hold for less than a year in tax-advantaged accounts, such as a 401(k), IRA, or Roth IRA. Remember, gains on short-term investments are taxed as ordinary income, which is subject to a higher tax rate than capital gains. The same is true for actively managed mutual funds that may generate significant short-term capital gains or the interest income on corporate bonds.

Qualified withdrawals from Roth IRAs and Roth 401(k)s are tax-free,¹ so it usually makes sense to use these accounts for assets that you expect will appreciate the most. Of course, tax-efficient placement presumes you have different account types. If most or all of your portfolio is in tax-deferred accounts, you'll want to focus on your asset allocation strategy.

Consider concentrating your donations into a single year. By giving more in one year, there's the potential to maximize your itemized deduction for that year. The next year, you can switch and take the standard deduction, which could increase your overall deductions for that two-year period, resulting in a large tax benefit.

In addition, if you're charitably inclined and planning on selling a significant amount of long-term appreciated stock, which will generate a large taxable gain, consider donating a portion of those assets directly to a charity. Subject to certain income limitations, you could get a tax deduction for the full fair market value of the donated stock and you won't have to pay taxes on the gain for those shares.

Many charities are unable to accept gifts of appreciated assets--like stocks or mutual funds--but you can use a donor-advised fund, which is another great tax tool to facilitate the donation process. When you place assets in a donor-advised fund, you get the full deduction for the charitable gift that year. Then, you can grant those assets to your favorite charity over time

These are just a few of the steps you can take to prepare for tax season and potentially minimize your tax bill. A qualified tax professional can help you find other effective ways to navigate tax season and answer specific tax questions based on your personal situation.

After you decide what to do this year, resolve to make tax planning a year-round exercise. By looking ahead, you'll find it easier to check your progress, update your plan and, if necessary, take action long before the tax-filing deadline.