Category: Financial Planning

Is Tithing Tax Deductible? Here’s What You Need To Know

Posted on August 25, 2025August 26, 2025 by Daniel Ruske, CFP®

For many people, tithing isn’t simply a line item in the budget—it’s a reflection of faith, purpose, and commitment. Whether it’s a regular donation to your church, support for a mission, or a quiet gift through online, the act of giving often carries meaning far beyond the dollar amount.

Still, when spiritual generosity intersects with financial planning, it’s worth understanding how those gifts are treated for tax purposes. While tithing can qualify as a charitable deduction, the specifics depend on a few important factors. Having clarity around the rules can help you stay aligned with your values, make informed decisions, and help you make the most of your giving.

Is a Tithe Tax Deductible?

Yes, tithing is generally tax-deductible, as long as you’re giving to a qualified organization. Most churches and religious institutions that meet the IRS definition of a tax-exempt organization fall under this category, meaning your tithe may reduce your taxable income when claimed as part of your charitable donations.

However, not every gift tied to religious activity qualifies. If your donation goes to an individual or a group that isn’t formally recognized as tax-exempt, it likely won’t count. Also, even when your tithe does qualify, you must properly record your deductions on your return to receive any tax benefits.

What Counts as a Qualified Religious Contribution?

Before deducting a tithe, it helps to know which religious gifts meet IRS standards. While many faith-based organizations qualify, not all do. Here’s what to look for when evaluating a religious contribution:

IRS Recognition of Worship Centers

Most churches, synagogues, mosques, and other religious institutions are treated as tax-exempt under section 501(c)(3), even if they have not formally applied.1 To qualify, an organization typically must adhere to certain attributes developed by the IRS. These include, but are not necessarily limited to, having a recognized form of worship, distinct religious history, formal code of doctrine, and regular congregations.2

Common Deductible Recipients

You can generally deduct charitable contributions (including tithes) made to religious schools, churches, faith-based nonprofits, and ministries that also serve a public good, such as shelters, outreach centers, or global relief organizations.

What Isn’t Deductible

Giving directly to an individual missionary, donating through a crowdfunding campaign, or supporting an informal fellowship or ministry without legal status under IRS rules usually won’t qualify. These types of gifts may still be generous, but they don’t meet the standard for charitable donations.

How to Check Eligibility

If you’re unsure whether your church or religious group qualifies, the IRS offers a free Tax Exempt Organization Search Tool online. If the group isn’t listed, consider asking them directly for documentation or a statement about their nonprofit status. Many churches will still seek out official IRS approval of their tax-exempt status. You can also contact an advisor a financial advisor to assist in this research.

Please Note: Donating through digital platforms is perfectly acceptable, as long as the recipient is a recognized tax-exempt organization.

Itemizing vs. Standard Deduction: How It Affects Your Tithe

Your ability to deduct a tithe hinges on one main decision: whether you itemize deductions or take the standard deduction. When you itemize, you list out qualifying expenses, including charitable giving, on your tax return. But if you take the standard deduction, you can’t separately claim your tithes as a write-off.

Given the size of the standard deduction, many people now find it more beneficial to skip itemizing altogether. That means even generous givers might not see a tax benefit unless their total deductions exceed the standard deduction amount for their filing status.

There are situations, though, where itemizing makes sense. For example, if you have significant mortgage interest, high medical expenses, or substantial charitable donations, adding your tithe to the list may push you over the standard threshold. In that case, itemizing can reduce your tax burden.

Some households choose to “bunch” their giving into a single tax year. Instead of giving the same amount annually, they double up one year and skip the next, allowing them to itemize in high-giving years and take the standard deduction in lower ones. It’s a strategy that may offer more flexibility depending on your income and tithing preferences.

How to Document Your Tithing for Tax Purposes

Claiming a deduction for your tithe doesn’t just depend on where you gave—it also depends on what kind of proof you have. The IRS wants clear, accurate records when it comes to charitable giving. That means a good paper trail matters. Here are key documentation points to keep in mind:

Written Acknowledgments: If you donate $250 or more in a single contribution, the IRS requires that you have a written acknowledgment from the organization. This letter or receipt must clearly state the amount given, the date of the donation, and confirm that you didn’t receive any goods or services in return, aside from intangible benefits like religious support or spiritual care.3

Receipts and Records: For smaller donations, such as weekly giving under $250, bank statements, credit card records, or canceled checks are usually enough. Still, it’s a good idea to hold onto receipts or log your giving throughout the year, especially if you intend to itemize.

Church Year-End Statements: Many churches send annual giving summaries to members. These year-end statements are especially helpful during tax season because they consolidate all of your donations in one place, making it easier to report them accurately on your Form 1040.

Electronic Giving Records: If you tithe through a mobile app or church website, those platforms often provide emailed receipts or account dashboards showing your giving history. These are perfectly valid for tax purposes, as long as they clearly list amounts, dates, and the qualifying organization’s name.

What Happens if You Tithe in Cash?

When it comes to tax reporting, not all donations are treated the same. The IRS makes a clear distinction between cash and non-cash contributions, and each category comes with its own set of rules, paperwork, and pitfalls. Whether you drop bills into the plate or donate physical goods to your church, the tax implications depend on how—and how well—you document your gift.

How the IRS Defines Cash vs. Non-Cash Donations

The term “cash contribution” doesn’t only refer to paper money. According to the IRS, cash donations include physical currency, checks, credit/debit payments, and online transfers. Anything that is readily converted into money and given directly to a qualified organization falls under this umbrella.

By contrast, non-cash donations involve property or goods—anything from musical instruments to clothing, sound equipment, or even real estate—given without a financial transaction. This category also includes stock or appreciated assets, though those often involve more complex documentation.

Documentation Differences That Matter

For cash gifts under $250, a bank statement or credit card record typically meets IRS standards. However, once your donation exceeds that threshold, you’ll need a formal written acknowledgment from the church.

Non-cash donations always require a more detailed paper trail, and if the value exceeds $500, you must file Form 8283 with your tax return.4 For gifts valued at more than $5,000, an independent appraisal may be needed to substantiate the deduction.5

If you’re tithing in actual cash—like bills in an envelope—you’ll have the hardest time proving your gift unless your church offers and tracks things like envelope numbers or logs of regular giving. Even then, it’s your responsibility to get that confirmation in writing.

Valuation Rules for Non-Cash Tithes

When giving non-cash items, the IRS expects you to use fair market value—the price a willing buyer would pay a willing seller. This can get tricky with used goods or items without a clear resale market. Churches are not obligated to assign a value to your donation; they’re only required to confirm receipt and describe the item. It’s up to you to determine the proper valuation and back it up with records or an appraisal, if needed.

Also, keep in mind that for tax purposes, your deduction is limited to the item’s value at the time of donation, not what you originally paid. This matters most when donating high-dollar items that may have depreciated over time.

Why Many Donors Prefer Non-Cash Giving Alternatives

While non-cash tithes involve more legwork, they can also offer better tax advantages. For instance, donating appreciated securities may allow you to deduct the full market value while bypassing capital gains taxes. Physical cash, on the other hand, provides no such benefit, and without solid documentation, it may not even qualify for a deduction at all.

That’s why many donors now lean toward giving methods that combine ease of tracking with potential tax perks, such as electronic transfers, donor-advised funds, or asset-based donations. These not only support your faith community but also leave a reliable trail when tax season arrives.

Giving Through a Donor-Advised Fund or Trust

For some individuals and families, giving isn’t limited to the Sunday plate—it becomes part of a long-term financial strategy. That’s where giving tools like donor-advised funds (DAFs) or charitable trusts come in. These vehicles provide added flexibility, especially for those managing wealth, fluctuating income, or larger assets. Here’s how they work:

What is a Donor-Advised Fund (DAF)?

These funds let you make a charitable contribution—whether in cash or other assets—and take a tax deduction right away. From there, you can suggest how and when the funds are distributed to eligible nonprofit organizations at your own pace. It allows you to include tithes as part of a broader giving strategy while keeping administrative tasks streamlined.

Trust-Based Giving

Charitable remainder trusts or charitable lead trusts are more complex but can be valuable in estate or income planning. These trusts provide income to you or your heirs for a period of time, with the remaining assets going to a qualified religious or charitable organization.

Appreciated Asset Contributions

Donating stocks, real estate, or other appreciated assets can offer a tax benefit by avoiding capital gains while still qualifying as a deduction. This strategy can lower your adjusted gross income (AGI), helping you stay under phase-out limits for other tax benefits.

Please Note: High-income earners or people with variable income—such as business owners or those with significant investment gains—may benefit most. These tools offer a way to align generosity with tax efficiency and estate planning. Also, you get the tax deduction in the same tax year you contribute to the fund or trust—even if the money isn’t given to the church until later. The timing of the actual distribution doesn’t affect when the deduction is claimed. That distinction matters when you’re managing year-end giving or trying to meet deduction goals.

Common Misconceptions About Donating and Taxes

When it comes to tithing and tax deductions, a few persistent misunderstandings can lead to overstatements, missed opportunities, or IRS headaches. Below, we clear up some common mistakes that people often make when trying to deduct religious giving:

Assuming Every Donation Is Deductible: A tithe only counts if it goes to a qualified religious organization. Gifts made to individuals—such as missionaries or pastors—or unregistered ministries usually don’t meet IRS standards. Even if your giving feels legitimate, it may not qualify on your tax returns without proper status and documentation.

Expecting an Automatic Tax Refund: A donation doesn’t directly equal a tax refund. Deductions reduce your taxable income, not the amount the IRS sends back. If you don’t owe much to begin with, or if you already had minimal withholding, a deduction for your tithe might not affect your refund at all.

Overlooking the Importance of Paperwork: Some people think a verbal acknowledgment or mental record is enough, but it’s not. If you’re ever audited, you’ll need written proof. Without receipts, year-end summaries, or acknowledgment letters, your deduction can easily be denied.

Believing Volunteer Work is Deductible: Time spent volunteering is meaningful, but the IRS doesn’t allow you to write off your hours. Only actual expenses—like supplies, travel mileage, or meals purchased during service—may qualify under certain guidelines.

Thinking Digital Giving Doesn’t Count: Whether you tithe through a smartphone app, automatic bank draft, or an offering plate, the IRS doesn’t care how the money was sent. What matters is who received it and whether you kept valid records. Online platforms often make it easier to track your giving, which can help when it’s time to itemize.

Misunderstanding Church Reporting Obligations: Religious institutions aren’t required to report your donations to the IRS. It’s up to you to document your contributions accurately and include them when filing. If you skip that step, the IRS has no way of knowing your tithe even happened.

FAQs About Tithing and Tax Deductions

Can I deduct tithes if I take the standard deduction?

Generally, no. Charitable contributions, including tithing, are only deductible if you itemize deductions on your tax return. However, under the One Big Beautiful Bill, there is now a limited above-the-line deduction available for certain charitable donations, even if you take the standard deduction. If your tithes qualify under this provision, you may be able to deduct a portion without itemizing. Otherwise, your tithes will only reduce your taxable income if your total itemized deductions exceed the standard deduction.

Is tithing to an online church deductible?

Yes—if the online church is recognized as a tax-exempt organization and provides proper documentation. The platform or method you use to give doesn’t matter. What matters is that the organization qualifies under IRS rules and that you receive a receipt or written acknowledgment for your gift.

Do I need to keep track of weekly giving or just year-end totals?

You’ll want to have both, if possible. For smaller gifts under $250, a record from your bank or credit card is usually enough. For anything over that threshold, a church year-end statement or written acknowledgment is required. Having weekly records can help back up your total giving if questions arise.

What if my church isn’t a registered nonprofit?

Donations to organizations without recognized tax-exempt status typically don’t qualify. While many churches are automatically treated as tax-exempt, some informal or start-up ministries may not meet IRS criteria. Always confirm the church’s standing by asking directly or searching the IRS database using the Tax Exempt Organization Search Tool.

Is there a limit to how much I can deduct in tithes each year?

Yes, there are limits, and the donation type and your income determine them. For most cash donations to qualified charitable organizations—including churches—you can typically deduct up to 60% of your adjusted gross income (AGI). This cap ensures that high-income individuals can’t zero out their tax liability entirely through charitable giving. That said, non-cash contributions (such as property or stock) often fall under lower percentage thresholds, like 30% or 20%, depending on the asset and organization.6

If your charitable gifts exceed the allowed percentage in one year, you don’t necessarily lose out—you may be able to carry the excess forward and apply it in future tax years, up to five years. This provision helps those who give substantially in one year but want to space out the deduction benefit over time. However, this strategy only works if you continue to itemize and don’t switch to taking the standard deduction.

It’s also important to understand deduction limitations and how they interact with your overall tax strategy. Just because you gave doesn’t automatically mean the amount is fully tax deductible. You’ll need to keep detailed records, obtain acknowledgment letters from the organization, and report the donation properly to have it count as part of your itemized deductions.

How do I deduct non-cash donations to my church?

When donating physical goods—like musical instruments, computers, or furniture—to your church, you’ll first need to estimate their fair market value at the time of donation. This value represents what someone would reasonably pay for the item in its current condition, not what you originally paid. If the total exceeds $500, the IRS requires you to fill out Form 8283 and include it with your itemized deductions.

For donations over $5,000, the IRS typically expects an independent appraisal to back up the valuation, especially for unique or high-value items. And no matter the value, always request a receipt from your church that clearly states what was donated and when. Keeping strong documentation helps support your tax deductibles if you’re ever audited.

We Can Help You With Charitable Giving

Tithing goes beyond routine giving; it expresses your convictions and the principles you live by. But when generosity meets the complexity of taxes, it’s worth taking a closer look. Understanding how charitable giving fits into your overall financial picture can help you stay true to your convictions while also making strategic decisions. When handled carefully, tithing can support both your spiritual goals and your long-term financial well-being.

The rules around tithing tax deductions can be nuanced. Whether it’s tracking donations, navigating the difference between standard and itemized deductions, or planning gifts through donor-advised funds, each decision plays a role. And when you’re also considering other tax elements—like capital gains, business income, or credits such as the child tax credit—it helps to see the full picture. The way you give can impact not just your current return, but your broader financial plan.

That’s where we come in. Our team of financial professionals can help you make giving part of a larger, intentional strategy. From maximizing tax benefits to aligning charitable giving with your estate or retirement plans, we’re here to provide guidance every step of the way. Schedule a complimentary consultation with us today to learn how your generosity can support more than just your values—it can support your future, too.

Resources:

The Best Way to Create a Retirement Income Plan

Posted on May 16, 2023March 13, 2025 by Scott M. Peterson, ChFC®

Scott Peterson was a guest writer on the popular White Coat Investor blog—a blog esteemed amongst physicians and other high-income professionals. Scott’s blog outlines our proprietary process for investing, The Perennial Income Model™. The article also presents a retirement income plan creation example of a couple who have accumulated $1 million for their retirement.

Click here to read Scott’s blog in its entirety on WhiteCoatInvestor.com.

What is Happening with Silicon Valley Bank?

Posted on March 24, 2023August 21, 2025 by Carson Johnson, CFP®, CRPC™, NSSA™

Recently, there has been growing concern over the stability of our banking system. Particularly following the collapse of several banks, the two most notable being Silicon Valley Bank (SVB) and Signature Bank. So, what is happening with Silicon Valley Bank and other banks? Is this a sign that our banking system is on the brink of collapse? The answer is likely no and I hope this blog gives you clarity on what is happening with a handful of banks across the nation.

In very simple terms, SVB and Signature Bank have experienced massive growth over the past few years. This was caused by a boom in venture capital. These banks invested a disproportionate number of deposits in long-term bonds when interest rates were at generational lows. Longer-duration bonds are particularly sensitive to rising interest rates. As interest rates rose, the price of these bonds plummeted.

Once it was announced that these banks had lost billions on their balance sheets due to their own mismanagement, customers became nervous and withdrew their deposits. A “bank run” is when large numbers of customers concurrently withdraw their deposits over fears about solvency. The recent bank run occurred over the course of a few days. This resulted in several banks being seized by regulators.

The United States’ primary safeguard against “bank runs” is FDIC insurance which stands for Federal Deposit Insurance Corporation. FDIC insurance covers up to $250,000 per depositor, per bank, per account type. Regardless of the factors that led up to the collapse of these banks, we know that roughly 90% of deposits at SVB and Signature Bank exceeded the FDIC insurance coverage limit and were therefore uninsured. You may now have a better understanding why a bank run by larger depositors was justified.

The reality of our banking system

What is happening with Silicon Valley Bank and other bank failures happens more often than you might think. In fact, there have been 565 in the U.S. since 2000 which is an average of almost 25 per year. The collapse of SVB and Signature Bank are unique, notably due to their size. The Silicon Valley Bank and Signature Bank were amongst the largest banks in the country. So, the question is, will the failure of these banks lead to a systemic bank crisis? The answer is likely no.

Many reputable banks go above and beyond the regulatory requirements that are imposed upon them. This is to ensure that they have enough cash on hand for customer withdrawals. This was not the case for SVB and Signature Bank. Lessons learned during the financial crisis in 2008 led to additional safeguards and regulations. This left the banking system in a much stronger position to address liquidity concerns. The simple way to secure your own bank deposits is to limit your bank account balances to fit within FDIC insurance limits in case your bank fails.

What if I have over $250,000 at my bank and exceed the FDIC insurance?

If you have more than $250,000 in deposits, you may want to consider the following ways to protect your deposits:

Open a new bank account at a different financial institution. There is no limitation on the number of banking relationships that you can have. The FDIC coverage is $250,000 per depositor, per bank, meaning that you will have $250,000 of coverage for every different banking relationship that you have.
Add a joint owner. The FDIC coverage is also based on the type of account you have. For a single depositor, you will have up to $250,000 of coverage. But if you have a significant other, then adding your spouse gives you a total of $500,000.
Open up a different registration type. A separate entity like a Trust or LLC account is also eligible for its own $250,000 of coverage.
Join a credit union. Credit unions have a similar program to FDIC called NCUA which stands for the National Credit Union Administration. NCUA provides protection up to $250,000 per depositor, per account type just like FDIC. The main difference is that credit unions are not backed by the full faith and credit of the federal government.
Revisit why you have that much money sitting in a bank and consider moving your cash to a brokerage account held at a large custodian like Charles Schwab, Vanguard, or Fidelity Investments etc. Although you are limited to $250,000 under FDIC, brokerage accounts are covered by a different type of insurance called SIPC. SIPC stands for ‘Securities Investor Protection Corporation’. If a custodian is in financial trouble, the SIPC serves as a backstop. SIPC generally covers up to $500,000 between cash and securities similar to how FDIC works. Many custodians like Charles Schwab have purchased SIPC coverage that exceeds these limits to fully protect the deposits of those that have millions of dollars invested at their firms.

What does the collapse of Silicon Valley Bank mean for me?

The FDIC insurance is an important safeguard that helps promote stability in the banking system and protects depositors’ hard-earned money. It’s good to be aware of FDIC insurance coverage limits. However, for the vast majority of deposits, bank defaults don’t pose a risk because most depositors don’t have deposits that exceed FDIC insurance protection. So, you might ask, “why did I write this blog?”

I wrote this blog to reassure our investors that what is happening with Silicon Valley Bank and other recently mismanaged banks is not the beginning of a collapse in the banking system. Unforeseen events like this happen. These events cannot be accurately predicted or prevented. Every investment has potential risks as well as potential rewards. That is precisely why FDIC insurance for cash and a well-thought-out investment plan like the Perennial Income Model™ go a long way toward mitigating risks for investors.

History has taught us that our financial systems do a good job of protecting our money. Volatility is the norm and even though we experience periods of short-term volatility, the economy has proven to be quite resilient. This too shall pass.

Ready to learn more about our proprietary investment plan, the Perennial Income Model™? Learn more here or schedule a complimentary consultation here.

6 Year End Financial Planning Strategies for 2023

Posted on November 8, 2023August 21, 2025 by Austin Lee

It’s hard to believe that we are winding up another year. We’ll be celebrating the new year before you know it. But before the year ends, let’s make sure you haven’t missed any retirement-enhancing or tax-saving opportunities! In this article, I will walk you through the basics of SIX year-end financial planning strategies you can implement. These strategies will decrease taxes or maximize your income during retirement.

Pre-retirement considerations

1. Make Health Savings Account (HSA) contributions

Making your tax-deductible contribution to an HSA is a great way to save taxes for the current year as well as secure your future retirement. HSA accounts are investment accounts set up for those with high-deductible health insurance plans to help pay for qualified medical expenses. Contributions to an HSA are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.

It is often overlooked, but HSA contributions can also be an additional way to save money for retirement. Once an individual is age 65, they can withdraw funds from an HSA for non-medical expenses. Taxes must be paid if not used for qualified expenses, but used this way, your HSA ends up being a supplemental IRA. Using an HSA is great for individuals with a high deductible health plan who are looking for additional ways to save money for retirement. Contributions must be made by December 31st, 2023!

Contribution limits to an HSA for 2023

Contribution limits for 2023 are $7,750 for a family ($3,850 an individual). Individuals ages 55 and older can contribute an additional $1,000. Be aware, contributions to an HSA must stop once an individual enrolls in Medicare.

2. Maximize your tax-deferred contributions

All contributions to an employer-sponsored retirement plan [401(k), 403(b), etc.] are due by December 31st. Employees are allowed to contribute a maximum of $22,500/year ($30,000 if you’re age 50 or older) to their retirement plans. Check your contribution amounts for the current year and evaluate if you can contribute more. Maximizing retirement plan contributions will give you immediate tax savings and more income in the future. Speak to your financial advisor to learn how you can maximize your retirement contributions for 2023.

For those already retired

3. Remember Required Minimum Distributions (RMDs)

All good things must come to an end, especially the tax-deferred growth of IRAs and 401Ks.

The IRS requires all individuals ages 73 and older (and those with inherited IRAs) to take distributions from their IRA accounts every year. It’s important to withdraw the full amount of your RMD before the end of the year to avoid a hefty fine!

Let’s assume you have an RMD of $10,000 for 2023. The penalty is a 25% tax on the amount of your RMD that you did not withdraw. So, if you forget to withdraw the required amount of $10,000, you will owe a penalty of $2,500 to the IRS, and will still be required to withdraw the $10,000 and pay the tax on the withdrawal.

As you can see, it costs a lot to forget RMDs. If you are charitably inclined, keep reading to see how you can avoid taxes by donating the amount of your RMD to charity.

4. Qualified Charitable Distributions (QCDs)

If you are 70.5 years old, you can make withdrawals from your IRAs tax-free as long as those withdrawals are sent directly to a charity. This can be done by doing a Qualified Charitable Distribution (QCD).

This is a huge tax benefit that charitably inclined retirees can take advantage of each year. Without the QCD, only charitable donors who itemize deductions receive tax savings by donating to charity, and with the current higher standard deduction, less than 10% of all taxpayers end up itemizing deductions. An additional benefit of QCDs is that they count toward satisfying the RMD requirement.

So, if you make donations to charity, you are age 70.5 or older, and have an IRA, you really need to investigate doing a QCD. Simply changing the way you donate to charity (donating to charity directly from your IRA versus writing a check) could save you significant tax dollars each year.

Feel free to reach out to any of our advisors if you question whether a QCD could benefit your particular situation. For a deeper dive into QCDs, you can visit this blog written by our founder Scott Peterson regarding QCDs. You can also learn more about QCDs by reading chapter 20 of Plan On Living.

5. Roth Conversions

The idea of a Roth Conversion is that you pay tax on a portion of your IRA money today to avoid paying higher taxes in the future. Even though it is a taxable event to convert a traditional IRA to a Roth IRA, the future tax-free growth of the Roth IRA can provide a great benefit.

A careful analysis of your current, as well as an estimate of your future tax brackets, will help determine if a Roth IRA conversion makes sense for you and your heirs. Instances where Roth Conversions make sense, include an abnormally low tax year, when the stock market temporarily declines, or if you desire to leave a large tax-free legacy for your heirs. Additionally, the 2026 Tax Bracket Reset might also make converting from an IRA to a Roth IRA appealing.

a. Abnormally low tax year

If you are currently living on money that has already been taxed such as cash from your savings account, a non-retirement account, or if you are in between jobs, you may be reporting significantly lower income this year than you will be in future years. Whatever the reason, if you are experiencing a low tax year, consider the benefits of a Roth IRA conversion while you are in a lower tax rate!

b. When the stock market temporarily declines

If your account is down this year, you’re not alone! So, make lemonade out of lemons by doing a Roth Conversion. Now could be a great opportunity for you to transfer taxable IRA dollars into a tax-free Roth IRA. By converting IRAs to Roth IRAs while the stock market is down, you are taking advantage of a temporary market downturn and creating a permanent tax reduction.

Let’s say that you started with $200,000 in an IRA at the beginning of the year. However, that $200,000 is now worth only $150,000 because of the slide in the stock market. If you convert the $150,000 to a Roth IRA, you will pay 25% less tax. This is because you are converting $150,000 versus the original $200,000 to a Roth.

c. Provide a tax-free legacy

If you have a desire to leave money to your children and decrease the taxes they will pay when they inherit this money, then a Roth Conversion could make sense. As noted earlier, inherited IRAs are 100% taxable to your heirs and are subject to RMDs. If all their inheritance is from a Roth IRA, they won’t have to pay a single penny to the IRS. If gifting money at your death tax-free is the goal, seriously consider converting your IRAs to Roth IRAs.

d. Beating the 2026 tax bracket reset

In 2017, Congress passed a law that decreased taxes. The law reduced tax rates for practically every income level, as well as reduced corporate taxes for businesses. Tax rates are scheduled to remain at these lower levels until the end of 2025 when they are set to jump back up to the pre-2017 higher tax rates. To avoid paying higher taxes in the future, when the current lower tax rates expire, you might consider doing a Roth IRA conversion now. In saying this, we acknowledge that tax laws are subject to change and a lot can happen between now and 2026.

There are a lot of considerations to make when deciding to do a Roth Conversion. This strategy requires in-depth analysis and will not be advantageous for everyone.

For additional insights regarding Roth IRA conversions, read chapter 20 of Plan On Living.

6. Tax Loss Harvesting

Let’s say that Clara bought a mutual fund in a non-retirement account three months ago for $100,000. Because of the recent downturn in equities, this investment is now only worth $80,000. Clara could simply hold on to that investment and wait for it to rebound to $100,000. If she did this, there would not be any tax benefits or consequences by waiting for the depleted shares to rebound.

However, Clara is an opportunist and hates paying income taxes. She decides to sell the diminished investment and create a $20,000 capital loss which would benefit her tax-wise. She then invests the $80,000 into an investment that will behave similarly to the one she sold. Then when the market rebounds, she would still have the $100,000 of value plus a $20,000 capital loss. This could save her several thousand dollars this year on her income taxes.

You are allowed to deduct up to $3,000 of capital losses per year against your ordinary income. Any losses in excess of $3,000 are carried over to the following year. Additionally, capital losses will offset any current or future capital gains that you may have.

It’s easy to get caught up in the holiday season as the year ends. Don’t let important planning deadlines slip away. Taking small steps now will decrease your taxes and will shore up your retirement outlook.

Please reach out to Peterson Wealth Advisors if you have questions about any of the year-end financial planning strategies or if you would like to schedule a complimentary consultation by clicking here.