By Robert Feather CFP®, ChFC®
There is more inside your tax return than your bottom line. For people who know how to read it, a completed return is a diagnostic of the entire financial picture: where money is held, how it is being taxed, what decisions from prior years are still carrying consequences, and where the opportunities for this year are hiding.
Most of that information gets filed away without a second look. The moves we outline below use the specific data your return just generated to make proactive decisions in four areas that tend to go unaddressed until the cost of inaction becomes obvious.
Where Your Investments Live Matters As Much As What You Own
Asset location is a consistently underused tool in financial planning, and your tax return is one of the clearest signals of whether it needs attention.
Different types of investments generate different types of income, and different income types are taxed differently depending on the account they sit in. Interest income held in a taxable brokerage account is taxed as ordinary income every year. The same investment inside a tax-deferred account is not. When investments are placed without a deliberate strategy, the typical result is unnecessary tax drag that compounds over time.
A large amount of ordinary income from bond funds in a taxable account is a signal. Significant short-term capital gains distributions from actively managed funds held outside a retirement account is another. These inefficiencies are fixable, but only if someone is looking for them. At Wealth Dimensions, asset location is part of how we build and maintain portfolios because the tax cost of getting it wrong is real even in years when markets are performing well.
This May Be a Year to Consider a Roth Conversion
Roth conversions tend to get a lot of attention, but the actual decision is highly specific to your individual income picture. That picture is never clearer than right after you have filed.
Converting a traditional IRA or 401(k) balance to a Roth triggers ordinary income tax now in exchange for tax-free growth and withdrawals later. It makes the most sense when your current tax rate is lower than you expect it to be in the future, or when you have deductions available to offset some of the conversion amount. A year with lower income than usual, years before Social Security or required minimum distributions begin, or a year where carryforward losses are available can all create a favorable window.
The math requires actual modeling. You need to know how much you can convert before crossing into a higher bracket, whether the added income could trigger Income-Related Monthly Adjustment Amount (IRMAA) surcharges on Medicare premiums, and whether the tax paid now is justified by the projected benefit later. At Wealth Dimensions, we model Roth conversion scenarios annually in the post-tax season window, working alongside clients’ CPAs to verify the numbers hold up across both dimensions.
Carryforward Losses Are an Asset You May Be Sitting On
If your return showed a capital loss carryforward from a prior year, that number deserves more attention than many give it. When realized investment losses exceed gains in a given year, the IRS allows you to carry the excess forward indefinitely to offset future gains.
What this makes possible. Carryforward losses can offset gains from portfolio rebalancing, the sale of a concentrated stock position, a real estate transaction, or a business sale. They can also offset up to $3,000 of ordinary income per year if not fully used against gains.
What to look for. Your Schedule D shows any loss carryforward from prior years. If you have one, the question is whether it makes sense to recognize gains intentionally this year to use it, or to reserve it for a planned transaction later. The Wealth Dimensions team tracks loss carryforward balances as part of clients’ ongoing portfolio strategy so the balance informs decisions throughout the year rather than surfacing as a surprise at filing time.
Charitable Giving Has More Planning Leverage Than Most People Use
The majority of charitable giving happens in the final weeks of the year as a reaction to tax planning conversations. That timing is better than nothing, but it leaves most of the available strategy on the table. Giving decisions made in April or May, when your income picture is clear and you have time to use the right vehicles, tend to produce better outcomes for both the cause and the after tax result.
Donor-Advised Funds
A donor-advised fund allows you to contribute assets and receive the full deduction in the year of contribution, then distribute to charities at your own pace over time. They also accept appreciated securities directly, allowing you to avoid capital gains tax on the appreciation while deducting the full fair market value.
Qualified Charitable Distributions
For those age 70½ or older, a qualified charitable distribution (QCD) allows you to transfer up to $111,000 per year directly from an IRA to a qualified charity without the distribution counting as taxable income. For people who do not itemize, this is a highly efficient giving mechanism available.
Deduction Bunching
Concentrating multiple years of giving into a single calendar year to clear the standard deduction threshold, then using the standard deduction in off years, can increase the total tax benefit over time without changing the overall amount you give.
At Wealth Dimensions, charitable giving strategy is part of the Financial Playbook we build with clients, coordinated alongside investment decisions and tax planning so the giving is structured to accomplish as much as possible in both directions.
To schedule a meeting, call (513) 554-6000 or visit wealthdimensions.com.
About Robert
Robert Feather serves as the Director of Financial Planning and Financial Advisor at Wealth Dimensions in Cincinnati, Ohio, where he leverages his extensive background as a fixed-income specialist to oversee the creation of comprehensive, tax-efficient client strategies. An alumnus of Northern Kentucky University, he holds both the CERTIFIED FINANCIAL PLANNER® and Chartered Financial Consultant® designations.
Frequently Asked Questions
What is asset location and why does it affect my taxes?
Asset location is the strategy of placing investments in the account types where they will be taxed most efficiently. Investments that generate ordinary income are generally better suited to tax-deferred accounts, while those producing long-term gains or qualified dividends tend to work better in taxable accounts. When it is not coordinated intentionally, the result is tax drag that compounds quietly year over year. At Wealth Dimensions, we review asset location as part of our portfolio management process and adjust it as clients’ accounts and tax situations evolve.
How do I know if a Roth conversion makes sense for me this year?
The decision depends on your current tax rate, your expected rate in retirement, available deductions, and the size of your traditional balances. There is no universal answer, but the analysis is most valuable when done with your actual numbers in front of you. At Wealth Dimensions, we model Roth conversion scenarios annually in the post-tax season window, working alongside clients’ CPAs to confirm the decision accounts for both the investment and tax implications.
What is a capital loss carryforward and how do I use it?
A capital loss carryforward is the unused portion of prior-year investment losses that the IRS allows you to apply against future gains. You can find it on Schedule D of your return. Once you know what you have, the question is whether it makes sense to recognize gains intentionally this year or reserve it for a planned transaction. At Wealth Dimensions, we track clients’ carryforward balances as part of their ongoing portfolio strategy so the balance is factored into decisions throughout the year.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.