Motley Fool Money - Act Now to Lower Taxes for 2026

Episode Date: October 3, 2026

In this next installment of our Financial Planning Challenge, Host Robert Brokamp and guest Fool Amanda Kish discuss fourth-quarter tax planning to make sure you are paying as much as you’re supposed to – but not a penny more. Topics discussed:-Maxing out tax-advantaged savings accounts-Tax-loss harvesting-Donating appreciated stock, and new rules for deducting charitable contributions for 2026-Getting your withholdings right to avoid penalties-Roth conversions-And more! Host: Robert Brokamp, CFP®, EAGuest: Amanda Kish, CFA, CFP®Engineer: Bart Shannon Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

What you can do to lower your tax bill for 2026 this week on the Saturday personal finance edition of the Mottley Fool Hidden Gems Investing Podcast. I'm Robert Brokamp, and it's the first Saturday of the month, so it's time for the next installment of the 26 Financial Planning Challenge, which we're calling a year well planned. And speaking of the year, it's now three-fourths over, making now a good time to do some fourth-corner tax planning and make sure you are paying as much as you're supposed to, but not a penny more. And here to answer eight questions that will help you optimize your taxes for 2026 is my foolish colleague Amanda Kish. Amanda, thanks for joining us again. Thank you so much. I'm glad to be back. All right. So I will ask each of the questions. Amanda will

explain why the question is important. And then I may add a thought or two. So let's start with question number one, which is, are you on track to max out or at least meaningfully increase your tax advantage retirement contributions this year? Yeah, great place to start. And that is important because assuming that you're making pre-tax contributions, every dollar that you put into a 401K, 403B, or traditional IRA is a dollar that doesn't get taxed this year. So just as a refresher for 2026, the 401K and 403B contribution limit is 24,500 with an additional $8,000 catch-up if you are 50 or older. And then if you're between the ages of 60 to 63, there's an even higher super ketchup limit to be aware of. And then for IRAs, the annual contribution limit is $7,500 or $8,600 with the

catch-up. So if you have been contributing a flat percentage since January on autopilot, like most of us, now is really the time to actually run the math. So pull up your last few pay stubs, see what you've contributed year to date, and then compare that against the annual limit. And if you've got the cash flow to do it, you can often increase your cost. contribution percentage for just the last few paychecks of the year to close that gap. Some employers will also let you make a true catch-up lump some contribution before December 31st, so that is worth checking with your plan administrator or HR to see if that's possible. And then if you're self-employed, of course, this question gets even more interesting because

if you've got a SEPIRA, solo 401K, those have much higher limits. So let's go into the tens of thousands of dollars. and the deadline for funding some of those extends past year-end and into your tax-filing deadline. So ultimately, no matter what kind of plan you have, it's worth a quick check toward the end of the year just to make sure that you're on track to max out those contributions, if possible. And I'll extend this to a couple other tax advantage accounts. Of course, there's the health savings account, which any contribution will lower taxable income this year. And then I'll also point out 529 college savings accounts, which don't really have an annual limit

and a deadline per se, but most states offer a deduction on the state tax return for contributions to a 529. Every state has their own rules, so make sure you look into your state's rules. But if you want to take that, it does have to go in before the end of the year. And if you want to take a distribution from your 529 for any qualifying expenses, you need to take that in the year that you incurred the cost. All right. Question number two, have you reviewed your taxable accounts for tax loss harvesting opportunities this year. Yep. So tax loss harvesting is the process of selling an investment.

And again, this only applies to taxable accounts. Selling an investment that is currently worth less than what you paid for it in order to realize that loss for tax purposes. So that loss can then offset capital gains that you've realized elsewhere in your portfolio this year. And then if those losses exceed the gains after everything's all totaled up, up to $3,000 of that excess can offset ordinary income such as your salary. Now anything beyond that $3,000 can then carry forward to future years indefinitely.

Tax loss harvesting matters most, I think, for people who are holding stocks or funds that have had kind of a rough year. But it is also relevant if you have rebalanced a taxable account and realized gains, let's say earlier in 2026, as those gains might now have an offsetting loss sitting somewhere else, in the portfolio. And of course, if we're talking about tax loss harvesting, I have to throw in there. The important thing that everyone needs to keep in mind here is the wash sale rule. So if you sell a security at a loss and then you buy that same security or something that the IRS considers substantially identical, within 30 days either before or after the sale, that loss then gets

disallowed for tax purposes. That's a 61-day window that can trip people up from time to time, especially with ETFs or exchange-traded funds, because two similar-sounding funds may be considered to be substantially identical, sometimes even if they are from different providers. So if you do want to stay invested in that same general asset class after harvesting a loss, look for a similar but not identical fund to swap into temporarily. And I will ask you. that tax loss harvesting isn't just for stocks and funds that really can be just about for any type of investment, including bonds, which have had a rough year. In fact, the Vanguard total bond ETF, which is the biggest bond ETF in the world, it's currently around $70 a share. So it's well below

its all-time high of almost $90 a share set in 2020. So you could do some tax loss harvesting with your bonds as well. And Amanda talked about a couple of ways to violate the wash sale rule. And I want to highlight a few others. So first of all, you can't buy. that investment back during that 61-day window and neither can your spouse. And you can't do it in another account. So you can't, you know, take the loss in your brokerage account and buy it in your IRA or 401k or your spouse do it. And one way that people accidentally buy shares of the investment is through automatic dividend reinvestment if they hold it in some other place. So that's something to keep in mind. And then one final thing to keep in mind is that there are lots of rules

around options as well, right? So you can't buy a call option on the investment and there's some other option strategies that could violate the wash sale rules. So make sure you know all of those. All right, let's move on to question number three. Do you know whether your bonds, Reiths, REITs being real estate investment trusts, and other income heavy holdings sit in the account type that makes sense tax-wise? Yes. This consideration is something called asset location, which is different from asset allocation. Allocations about what percentage of your portfolio is in stocks versus bonds versus other categories. Asset location is about which account each of those pieces lives in. So a taxable brokerage account, your traditional IRA, your Roth IRA. And all of these pieces

and where you have your investments can meaningfully change your after tax return without changing your actual investment mix at all. So, bro, you mentioned bonds, reeds, other holdings like that that tend to generate a lot of ordinary income, those get taxed at your regular income tax rate every single year. And that's even if you never sell them, you never touch the cash, that income is going to show up on your 1099. So if those holdings are sitting in a taxable brokerage account, you're paying tax on that income annually year after year. Now move the same holdings into a traditional IRA or 401K, and that income compounds taxable. deferred until you eventually withdraw. Now, meanwhile, if we consider you're more typically

tax-efficient holding, so these are things like broad market index funds that very rarely distribute large-cap gains or individual stocks you may be holding long-term, those tend to do relatively little damage sitting in a taxable account because you're not paying tax on that unrealized depreciation. So the exercise here is simple. Pull up your account statements across all of your accounts, taxable, traditional, and Roth, and look at what's actually sitting where. So if, for example, your bond funds are concentrated in the taxable account and let's say your growth stocks are concentrated in the IRA, you may be able to swap the two around so long as you're not triggering any kind of unnecessary capital gains taxes to do it. And I agree that most income generating

investments should likely be in your traditional IRA. I'll just point out, though, that some bonds do have built-in tax advantages that you may lose once they're in a retirement account. So municipal bonds, for example, could be completely tax-free, state and federal, if you do it right. Generally, you probably want to have those outside of the IRA. Treasuries are taxable at the federal level, but not state level. It probably still makes sense to keep them in your traditional IRA, but I just want to point that out. And again, I think most experts would agree with putting the bonds in the traditional IRA. The Roth is a little different. I mean, that's the tax-free account. It's the one you want to grow the most. So really,

you would use that account for your highest returning assets. Now, those are stocks, of course. Ideally, hopefully, you could choose what stocks you think will have the highest returns. You would put them in your Roth. Of course, it's not easy to do. But it's definitely a way to think about it. And you would generally not hold bonds or cash in a Roth account. All right, let's move on to question number four. If you give to charity, have you looked at giving appreciated or using a donor-advised fund instead of writing a check. Yes. So if you are planning to donate to charity anyways, gifting appreciated stock that you've held for more than a year

may be more efficient than giving cash. So when you donate stock directly, you avoid paying capital gains tax on that appreciation entirely. And then you still get to deduct the full fair market value of the stock at the time of the gift, not just what you were originally paid for it. Conversely, writing a check certainly gets you that deduction, but you do miss the cap gain savings because you never had a taxable event to begin with. A donor advised fund then takes that a step further. So here you contribute a lump sum that can be cash, stock, or other assets into the fund in one tax year, and then you take that full deduction immediately, even though the money doesn't need to go to any specific charity right away. So then from there,

you can distribute grants to charities over the following years on your own timeline. And this is something that can be especially useful if you're having an unusually high income year and you want to bunch several years worth of that plan giving into this year to maximize the deduction against this year's income rather than spreading those smaller deductions across future years when your tax bracket might be lower. And one more wrinkle worth mentioning, if you, take the standard deduction most years, if you bunch several years of giving into a donor-advised fund in one year, that may be what pushes you over the threshold to itemize that year, which is where really a lot of the tax benefit of charitable giving actually gets unlocked.

Yeah, and I'll build on that by pointing out that to deduct the donation of appreciated stock, you do have to itemize. And there's a limit on how much you can deduct in any single year for really any charitable deduction with excess amounts carried forward up to five years. But even if you can't take the deduction, you're still getting the tax benefit by donating appreciating chairs

because you're passing that capital gain onto the charity, and they don't care because they're tax exempt. Then with the cash you would have donated to the charity, you can just buy back the stock immediately. You don't have to wait 30 days or anything like that, and you've set yourself to a higher cost basis. So, in my opinion, if you regularly give to charity,

there's almost no reason not to donate appreciated shares rather than donate cash. It says we're talking about deductions, I do want to highlight two new rules that took effect this year. So you can deduct up to $1,000 of charitable donations, $2,000 for married couples filing jointly without having to itemize. But that money does have to go to a qualified 501C3 organization. Any donations to a donor advice fund or a private foundation is not eligible for this other

deduction. Now, for those who do itemize, you're not going to be able to take quite the deduction you have in previous years, because starting this year, only charitable deductions in excess of 0.5% of your adjusted gross income will be deductible for those who itemize. So, for example, if your AGI is $150,000, you'll only be able to deduct contributions in excess of $750. All right. Let's move on to question number five. Are you confident your withholding or estimated payments will avoid a surprise tax bill or penalty next April. Yes. Unfortunately, the IRS generally expects you to pay tax on your income as you earn it throughout the year, not all at once when you file annually. So if you've had any kind of life

change in 2026, and this could be a bonus that you've received, a new job, a home sale, freelance or 1099 income, a large capital gain from selling investments, there's a real chance that your withholding hasn't kept pace with what you'll actually owe. So here it's important to keep in mind the Safe Harbor rule. And what that means is that generally you can avoid an underpayment penalty if you've paid through a combination of withholding and estimated payments at least 90% of this year's tax liability or 100% of last year's liability. Although it's a caveat that increases to 110% if your prior year income was above 150.

So if you're not sure where you stand with your current withholdings, the IRS does have a free withholding estimator tool, or this is something that your tax prepare, if you use such an individual, can run a projection based on your income year-to-date. And if it does look that you're behind, you basically have two levers at your disposal. You can increase withholding from your paycheck for the remaining months of the year, which the IRS will treat as if it were paid evenly. throughout the year, even if it's a little bit more concentrated in Q4, or the other options to make an estimated quarterly payment directly. And that fourth quarter estimated payment deadline for 2026 is January 15th of 2027. So you do still have time to true that up even after year end. I'll just add that there could be a

benefit to doing this to making sure that you are paying enough taxes. Because if you experienced some sort of change, maybe your income was lower, or you said had something happened that will qualify you for a tax credit or deduction, it could be your overpaying taxes. And I know everyone loves to get a refund when they file their taxes, but the truth is you're basically losing the use of that money. It could be in your bank account earning interest. It could be in your retirement account's growing. So you definitely don't want to overpay if you can help it. And I'll just reemphasize that if you don't pay enough, then you don't fall. under those safe harbors, you are going to pay a penalty and maybe interest. So you definitely want to

make sure that you get this as close to right as possible. All right, let's move on to question number six, which is, if you're subject to required minimum distributions, have you planned this year's amount and whether a QCD makes sense? So if you are 73 years or older, or bro, as I've sometimes heard you say, 73 years or wiser, the IRS requires you to withdraw a minimum amount from your traditional retirement accounts every year. That's your required minimum distribution or RMD. And that amount is calculated based on your account balance as of December 31st of the prior year.

So to calculate the 2026RMD, you would look at the December 31st, 2025 balance. And that is divided by a life expectancy factor from IRS tables. And if you miss the deadline or you withdraw less than required, the penalty can be pretty steep. that's about 25% of the shortfall, although that can be reduced to 10% if this is something that is corrected promptly. So keeping that in mind, here's something to consider. If you are charitably inclined, a QCD or qualified charitable distribution lets you direct some or all of your

RMD, that's up to $11,000 in 2026, straight from your IRA to a qualifying charity. Now, that's amount counts towards satisfying your RMD, but it does not count as taxable income. You compare that to taking the RMD yourself and then donating the cash afterward, where that distribution is going to show up as income first, and then the charitable deduction only helps you if you itemize. So a QCD kind of sidesteps that entirely, and it's one of the few moves in the tax code where giving money away can directly lower your reported income, not just your deduction. But just as a note, the mechanics here do matter how you carry that QCD out. QCD has to go directly from the custodian to the charity. So if that money touches your hands first, it no longer qualifies. So

if this is something you're thinking about, it's worth setting up with your custodian well before year end rather than waiting until the final days of December. Yeah, I'll just highlight that what might happen is sometimes your custodian will send you the check and you have to hand deliver it to the charity, that's okay as long as the check is made out to the charity and not to you. So that's just another aspect about doing the QCD. Getting back to RMD's, one thing to know is if you're married, you have to calculate them separately from your separate accounts. You can't like calculate the RMD and then just take it from one spouse's account or the other.

However, if you personally, individually have multiple IRAs, you have to calculate the RMD for each account, but it only has to be taken out of one IRA. 401ks are different. If you have multiple 401ks, you have to take the RMD from each. And then just you might also have to take an RMD from an inherited account. That's a complicated topic. It depends on your relationship to the person who you inherited the account from and your age and various other criteria. but just know that you might be in a choice where you have to take an RMD from an inherited account. From morning hockey with a cup of coffee to Timbits and road trips. Tims and Canadian tire have always gone together. Now it's official.

You can now earn Canadian tire money at Tim's. Link your Triangle Rewards and Tims Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit Tim Hordens.ca. slash triangle for details. Moving on to question number seven. Do you know which federal tax bracket you're likely to land in this year and whether that changes any moves worth making before your end? Yeah, your marginal tax bracket is really the thread that runs through almost every other tax strategy that we're talking about today.

It determines, you know, how much a Roth conversion will actually cost you, whether harvesting a gain versus a loss makes more sense, how valuable a charitable deduction is, whether a extra retirement contribution is worth more. to you now or might be worth more taken as income in a different year. And the reason this deserves its own dedicated check is that a lot of people are estimating their bracket based on a typical year when 2026 might not have been typical for you. So if there was something like a bonus, a promotion, layoff, a severance pay, a big capital gain from selling a business or a home, a spouse, starting or stopping work, any of these things can shift you into a different bracket than you might assume from habit and from what has been true for you in the past. These federal brackets are also adjusted annually for inflation. So even without any big life changes, the income level at which you

cross into that next tax bracket has moved from last year. So the practical step here is to pull together a rough estimate of your total taxable income for 2026. That includes wages, investment income, any one-off events, sometime before the year closes so that you're acting on a real number rather than a guess. And that single number is what makes questions like the Roth conversion or charitable bunching decisions answerable with any real confidence.

You can use online tools to help you with these calculations. Most of the online tax prep providers also provide free calculators for folks. So like Tax Act, H&R Block, into it. You'll find other calculators at other places like dinkytown.net has a 1040 calculator. I would say actually that's my problem, my favorite. It's the most intuitive

to use. Just make sure that if you're going to use these tools that you choose 2026, sometimes for the default is 2025. And in some cases, they haven't come out with the 2026 tool yet. So you definitely want to use one that can calculate your tax bill for 2026. And I would not use them and, you know, base my actual tax return on it. I think they're best used as getting a rough idea of what the could be based on certain decisions, such as, like Amanda said, doing a Roth conversion or contributing to a traditional account versus a Roth, those types of the value of any kind of deduction right now. It can give you a rough idea, put some numbers to it, and if you put it in the information correctly, it will give you an idea of what your tax bracket will be this year.

All right, let's move on to our final question. Does a Roth conversion make sense for your situation? Yeah, this is a good one. And a Roth conversion means moving money from a traditional IRA or 401k into a Roth account and paying that ordinary income tax on the converted amount in the year, which you do it. So in exchange, that money grows tax free from that point forward. Qualified withdrawals and retirement are also tax free. There's no RMDs on the Ross side either, which can matter for estate planning as well as your own retirement income. So the typically scenario where Roth conversion makes sense is in if you are in a lower income year, if you are between jobs, in your early retirement before Social Security or pension income starts, or any year where your taxable income is temporarily depressed relative to your normal working years. Converting while you're in that lower bracket means that you're paying tax on that money at a cheaper rate than you likely would either during your peak earning years or later.

in your retirement once RMDs and Social Security kick in and push your retirement income back up. That's not always universally the right move, though. So a couple of things to consider, you need enough cash outside the retirement account to pay the tax bill on the conversion. So using the IRA itself to pay for that tax really defeats a lot of the purpose of the exercise. And then equally important, converting a large amount can put you into a higher bracket for that year. So you have to run the numbers, and it may make more sense to then do that conversion in smaller, more deliberate slices over several years rather than all at once. And that's exactly where that bracket estimate from earlier becomes essential. So converting

an amount that kind of fills up your current bracket without spilling into the next one is usually as a sweet spot and a good target to aim for. Yeah, and I'll just point out that doing a Roth conversion doesn't just increase your tax bill itself. It increases your adjusted gross income. And there's a lot of things in your finances that are based on your adjusted gross income, such as your eligibility to take some deductions of credits, make Roth IRA contributions. Maybe, you know, it could affect you if you're on an income-based student loan repayment plan. could affect how much you pay for premiums through the Affordable Care Act or through Medicare. So you definitely want to have an idea of the whole picture when you're doing these Roth conversions. All right, Amanda, what are your final thoughts when it comes to tightening up your taxes for 2026?

Thank you, bro. I would say that I think for a lot of us, taxes are usually treated like an April problem. But the thing to keep in mind is that by April, most of your options are already gone and you're basically just reporting what has already happened. If we're talking about December and where we currently are, October, November and December, that's a different picture. So every one of these tax strategies that we've talked about represents a decision that you can still make for 2026 with weeks to actually implement it, whether that is contributing more to your retirement accounts, harvesting a loss, a gifting stock instead of cash converting into a Roth, what have you. You don't need to act on all of these that we've talked about, but even identifying two or three that genuinely applied to your situation

and following through before December 31st can make a real difference in what you own next spring. And I'll add as the final note from me that everything we've talked about here is true for federal taxes, but state taxes can be different in most situations. your state tax situation is going to be similar, but there are a lot of one-offs. So, for example, we talked about QCDs being excluded from your income. That's actually not the case in New Jersey. New Jersey doesn't exclude a QCD from your income. There are other little things like that.

Like, you know, if you have leftover money in your 529, you can transfer it to a Roth IRA. If you do it right, it's a tax-free transfer on the federal level, but California, it's not tax-free. So just understand what the rules are for your state. And with that, that's the end of our show. I want to thank Amanda for joining us once again. And thanks to Bart Shannon, the engineer for this episode. As always, people on the program may have interest in the investments they talk about and the Motley Fool may have formal recommendations for or against.

So don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. See our full advertising disclosure. Please check out our show notes. I'm Robert ProCamp. Full on, everybody.