'The No. 1 Mistake I See With Clients’: How Small Financial Choices Can Lead to Huge Tax Bills

Core Insights - The IRS assessed approximately $4.8 billion in estimated-tax penalties on over 15 million individual returns in fiscal year 2024, nearly tripling the amount collected two years prior, primarily due to underpayment of taxes from various financial decisions [2] Group 1: Tax Implications of Financial Decisions - Many individuals underestimate the tax implications of their financial decisions, leading to significant tax bills that could have been avoided with proper consultation [3] - Selling investments held for under a year results in ordinary income tax rates ranging from 10% to 37%, while holding the asset longer can reduce the tax rate to 0%, 15%, or 20%, demonstrating the importance of timing in sales [4] - Required minimum distribution (RMD) mistakes now incur a 25% penalty, emphasizing the need for careful planning around withdrawals from retirement accounts [5] Group 2: Retirement Account Strategies - Withdrawing from traditional IRAs or 401(k)s before RMDs at age 73 can be beneficial if done during lower tax bracket years, but delaying withdrawals can lead to higher tax brackets when mandatory withdrawals begin [6][7] - Financial experts recommend strategically utilizing pretax accounts between retirement and age 73 to manage taxable income and avoid significant tax increases later [7] Group 3: Tax-Loss Harvesting - Tax-loss harvesting allows individuals to sell depreciated investments to offset gains, with Wealthfront clients saving an estimated $49.83 million in 2024 through this strategy [8]