There are still a few weeks left in the year, giving you a bit more time to make important money-saving tax moves for your investments. And considering all the tax changes that took place in 2013, some last-minute tax maneuvering may be a good idea. Before you make any decisions about selling or keeping your assets, you need to determine what the best tax move is. The end of the year is an excellent time to review your investment portfolio and identify the winners and losers. We discuss some important money-saving tax moves you need to make now!
1. Offset Capital Gains and Create Capital Losses
Your investment losers have value –- especially when it comes to income taxes. There are two ways you can sell off the losers to improve your tax situation, in order to offset capital gains and create capital losses. Offsetting capital gains. If you have substantial capital gains this year, now is the time to begin selling losers, which will create losses to offset any gains. Capital gains are simply realized gains. If you are holding stocks with substantial losses –- perhaps hoping they will recover later -– you will then have unrealized losses. This means you will be paying taxes on the gains and not getting an offsetting benefit from your losses. Take the losses now and use them to reduce your tax liability on your year-to-date gains. Creating capital losses. Aside from capital gains, if you’ve had a strong earnings year and want to lower your income tax liability, you can do so by selling losing stocks for a capital loss. You can deduct up to $3,000 in capital losses against other income each year, and any loss above this threshold can be carried forward into future years. For what it’s worth, if a stock is in a losing position after the year we’ve had in the market, it likely won’t recover any time soon. Apart from the tax advantages of creating capital losses, now is a good time to begin pruning your portfolio of losing stocks in preparation for a new year.
2. Will You Be in a Higher Tax Bracket in 2014?
If you’re certain you will be in a higher tax bracket in 2014, it may make sense to sell winning stocks before year-end. This will move your capital gains income into 2013 when your taxes will be lower. This is even more important if you’re at the capital gains income threshold. If you’re in the 15% tax bracket, which is up to $72,500 if you’re married filing jointly ($36,250 for single filers), your long-term capital gains are taxed at zero. If you go over the threshold, they’ll be taxable at a rate of 20%. If you are in the 15% bracket for 2013, and expect to exceed it in 2014, you may want to sell as many winning stocks as possible. Just make sure the additional capital gains income doesn’t push you into the next tax bracket.
3. Make or Maximize Retirement Contributions
If you participate in an employer sponsored retirement plan, such as a 401(k), you must make contributions no later than December 31 in order for them to be deductible for income tax purposes. If you are below the employee contribution limits for 2013 –- which is $17,500, or $23,000 if you’re age 50 or over –- you may be able to increase your contributions through the end of the year. This does not apply to self-directed retirement plans, such as IRAs. Under these plans you have until the tax filing date (April 15th) to make contributions to reduce your income for 2013. But if you plan to start an IRA you must at least establish the account by December 31st in order to take any deduction at all.
4. Make Major Business Purchases Before Year End
If you own a business, you may want to make any major business purchases before December 31st. Under the Section 179 provision, you may be able to deduct up to 100% of the purchase price of equipment used for your business. This will be an especially important tax maneuver in 2013 because the maximum deduction (currently $500,000) is set to drop to $25,000 in 2014. A Section 179 deduction is a form of depreciation, but it allows you to deduct (or depreciate) the entire cost of the asset in the current year. There are some limitations on the deduction –- it cannot create an overall loss in your business, and it is limited to no more than $25,000 for motor vehicles even in 2013. There are other limitations, so you will want to discuss this strategy with your CPA or other tax preparer before making a purchase.
5. Open a 529 College Savings Plan
Similar to retirement plan contributions, you can make tax-deductible contributions to a college savings account, typically a 529 plan. As long as the money in the plan is used for higher education, it’s not subject to federal income taxes. The money in the plan can often be invested much the same way you would invest funds in an IRA, so it also represents a way to create an additional investment vehicle. Best of all, you aren’t limited to making a 529 contribution for your children only. You can do so for grandchildren and even for friends. There’s still some time left in 2013 for last-minute tax strategies, but if you plan to make them now is the time!