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Year-End Tax Planning and the Risk of Coordination Failure

Several sheets of paper layered into one neat stack on a desk

Year-End Tax Planning and the Risk of Coordination Failure

Each year-end decision can be sound alone and still conflict with the others.
By Frank Lovaglio, RFC® · Managing Partner, Security Financial Management · CRD #1299700
Reviewed by Dave Allen, CFP® · CRD #1210763 · Published October 2026 · Last reviewed October 2026
Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC (Kestra IS). Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS). Security Financial Management, Bluespring Wealth Partners, LLC, Kestra IS and Kestra AS are affiliated through common ownership by Kestra Holdings.

Year-end tax planning is often mistaken for a search for every possible deduction before December 31. While a deduction may lower this year’s tax bill, it does not automatically ensure that the gains, losses, conversions and gifts decided around it are working together. When those decisions occur in isolation from one another, coordination failure can develop on the return that adds them together.

Several year-end tax decisions, each in a separate account, feeding into one tax return

The Thinking Pattern: Annual Optimization Bias

The pattern that appears often at year-end is Annual Optimization Bias, the habit of treating the current year’s tax bill as the thing being managed. It is a reasonable focus. The bill is visible and the deadline is fixed, so a deduction or a harvested loss produces a number the household can see within the year.

What makes it a planning illusion is the confidence it produces. A household that has located its deductions tends to treat the question as answered, because the part that could be counted has been counted. Two questions never arrive as a line on a statement: which account might buy the same fund within a month of the sale, and how a conversion changes the income other deductions are measured against. Neither competes for attention. These are usually careful decisions, made with little view of the rest of the return.

The Structural Pattern: Coordination Failure

Underneath the thinking sits a structural problem, Coordination Failure: separate decisions that were never checked against one another. Year-end exposes it because each decision sits in a different account and answers to a different rule.

A loss harvested in a brokerage account is disallowed if the seller’s own IRA buys substantially identical securities within 30 days before or after the sale, and the IRA’s basis does not rise to make up for it.1,2 The year’s required minimum distribution cannot be converted.3 A qualified charitable distribution cannot go to a donor-advised fund,4 and a gift to one does not count toward the charitable deduction available from 2026 to households that take the standard deduction.5,6 For people 65 and older, taxable conversion income can reduce the $6,000 senior deduction, in effect for 2025 through 2028.7

What This Means

Read together, the two patterns explain a specific kind of surprise. Attention goes to the decision that produces a visible number, usually the deduction, while the rules that connect one decision to another sit in places nobody was looking.

A household can be both careful and poorly positioned. Each choice withstands scrutiny alone: the loss was real and the conversion amount was chosen with care. None of these choices is an error on its own terms. What was never held in one view was the return that adds them together. Careful work on each piece cannot substitute for a view of the whole, because the rules interact at the level of the return.

Strategic Perspective

Several tax rules measure against one total on the return. On a personal return, charitable limits are measured against the contribution base, which is generally adjusted gross income.8 The senior deduction shrinks as modified adjusted gross income rises above a threshold, and taxable conversion income counts toward that figure.7,9 A Roth conversion is normally reported in the year it is made, so its income lands on that year’s return.9 A capital loss is netted against capital gains before any part of it reaches ordinary income.10 A qualified charitable distribution, up to the annual limit, is left out of gross income and also counts toward the required minimum distribution.4,11 Each of these rules measures against a total that other decisions have already changed.

The goal of year-end tax planning is not finding every possible deduction before December 31 — it is coordinating gains, losses, conversions and gifts into one return.

This analysis describes a pattern in how households approach year-end and how Security Financial Management examines it. It does not recommend a course of action for any particular reader.

Next, the Resource page, Year-End Tax Planning, turns this into a working reference: what each year-end decision requires and the date it stops being available.

Sources

  1. 26 U.S.C. §1091(a): no deduction for a loss where, “within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date,” the taxpayer acquires substantially identical stock or securities. law.cornell.edu Accessed October 5, 2026.
  2. Rev. Rul. 2008-5: where a taxpayer’s IRA or Roth IRA buys substantially identical stock within 30 days of a loss sale, the loss is disallowed under §1091 and the account’s basis “is not increased.” irs.gov Accessed October 5, 2026.
  3. IRS Publication 590-A (2025): “You can’t convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 73) under the required distribution rules.” irs.gov Accessed October 5, 2026.
  4. 26 U.S.C. §408(d)(8): a qualified charitable distribution, up to the annual dollar limit, “shall not be includible in gross income”; it is a distribution made directly by the trustee to an organization described in §170(b)(1)(A), other than a §509(a)(3) organization or a §4966(d)(2) fund or account (a donor-advised fund). law.cornell.edu Accessed October 5, 2026.
  5. 26 U.S.C. §170(p): for a taxpayer who does not itemize, the deduction is limited to cash contributions of not more than $1,000 ($2,000 on a joint return), and not to a §509(a)(3) organization or “for the establishment of a new, or maintenance of an existing, donor advised fund.” law.cornell.edu Accessed October 5, 2026.
  6. IRS Topic no. 506: “Beginning with tax year 2026, if you do not itemize, you may deduct up to $1,000 ($2,000 if filing jointly) of your cash contributions to certain qualified organizations.” irs.gov Accessed October 5, 2026.
  7. 26 U.S.C. §151(d)(5)(C): the $6,000 amount “shall be reduced (but not below zero) by 6 percent of so much of the taxpayer’s modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).” law.cornell.edu; IRS: “For tax years 2025-2028, taxpayers who are age 65 or older may be eligible to claim an additional $6,000 deduction per person.” irs.gov Accessed October 5, 2026.
  8. 26 U.S.C. §170(b)(1)(H): the contribution base “means adjusted gross income (computed without regard to any net operating loss carryback).” law.cornell.edu Accessed October 5, 2026.
  9. IRS Publication 590-A (2025): conversion amounts “are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.” irs.gov Accessed October 5, 2026.
  10. 26 U.S.C. §1211(b): capital losses are allowed “to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of (1) $3,000 ($1,500 in the case of a married individual filing a separate return).” law.cornell.edu Accessed October 5, 2026.
  11. IRS Publication 590-B (2025): a qualified charitable distribution counts toward the required minimum distribution. irs.gov Accessed October 5, 2026.

About the Author

Frank Lovaglio, RFC® · Managing Partner, Security Financial Management. CRD #1299700. Verify credentials at BrokerCheck by FINRA or SEC IAPD.

Disclosures

The information presented is for educational purposes only and does not constitute legal, tax, or investment advice. The deductions, limits, thresholds and deadlines referenced are set by the Internal Revenue Code and IRS guidance for the tax years named, several of them adjust each year, and all are subject to legislative and regulatory change. Decisions about selling securities, converting retirement accounts, giving to charity and the timing of income should be reviewed with a qualified tax professional familiar with your specific situation. Nothing here is a recommendation to sell, convert, give, withdraw or defer any asset or income. Past performance is not indicative of future results. Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC (Kestra IS). Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS). Security Financial Management, Bluespring Wealth Partners, LLC, Kestra IS and Kestra AS are affiliated through common ownership by Kestra Holdings. Verify advisor credentials at BrokerCheck by FINRA or SEC Investment Adviser Public Disclosure.