As another year draws to a close, it’s time to start thinking about taxes, perform a review of your finances and investment portfolio, and figure out what moves you should take before the end of the year. No one likes to pay more taxes than they have to, so we’ve interviewed an expert who shares the best year-end tax tips for your portfolio.
As your assets grow, it’s important to review your situation, including which investment income qualifies for lower tax rates, like qualified dividends and long-term capital gains.
You’ll want to understand the cost basis for figuring your capital appreciation, and understand the rules that come with defining certain income sources.
Henry R. Goldstone, CPA, CFS, and Senior Vice President at Hillis Financial Services, has a few tax tips to consider as you spend the next couple of weeks preparing for the end of the year:
1. Contribute to Tax-Deferred Retirement Vehicles
If you’re looking for another tax deduction, and you still have the ability to contribute to a tax-advantaged account, so now’s the time to make your move. You can get a benefit from contributing to 401(k)s, IRAs, or, if you are a business owner, there might be tax benefits involved when you contribute to your own defined benefit plan.
Also, don’t forget the Health Savings Account. If you qualify for one of these accounts, you can make a tax-deductible contribution that not only helps your situation now, but, if you use the money on qualified costs later, helps you indefinitely, since the money in your HSA grows tax-free.
It’s one of my own favorite types of tax-deferred accounts.
2. Analyze Your Portfolio and Harvest Losses
Goldstone points out that now’s the time to look through your portfolio to evaluate what moves need to be made. If you need to rebalance, or if you have some stubborn losers that it’s time to get rid of, you can sell and harvest your losses.
Why? Because your capital losses can be used to offset capital gains. So, if you sold some investments earlier in the year and reaped gains from capital appreciation, you can reduce what you owe.
Additionally, if your capital losses exceed your capital gains, you can take up to $3,000 of that and apply it towards other income. Keep good records, though, since you can carry any unused portion forward indefinitely.
Don’t forget about the IRS wash sale rule, either. You can’t sell a losing stock, reap the deduction, and then turn around and buy the same thing (or something substantially similar) for a bargain price within the next 30 days in the hopes of doing well when the asset recovers.
3. Defer or Accelerate Your Income as Needed
Too often, we get caught up in the idea that our income is our income, and that you have no control over when it lands in your bank account. The reality is that you can actually defer some of your income, or accelerate it, as needed. Run a quick calculation to see what tax bracket you might be in.
“If you can, defer income if you’re going to be in a high marginal tax rate,” suggests Goldstone. If you know you’ll be hit with additional taxes, you might be able to take a holiday bonus after the first of the year, or if you can put off taking a distribution for another month without penalty.
Reducing your income can also be a good idea if your investment income will take a hit as a result of higher taxes due to the Affordable Care Act. If you’re in a higher marginal tax bracket, you’ll have to pay a couple of surtaxes on your investment income. If you can defer some of your income, or plan to take deductions that bring you into a lower tax bracket, you can avoid some of these extra taxes.
Goldstone also points out that you can accelerate your income to your benefit as well. If you’re going to be in a lower tax bracket, and you have a little more room, see if you can shift some of your income to this year, rather than the beginning of next year.
It won’t materially increase your tax liability, but it could give you a little more breathing room next year.
4. Pay Property Taxes and State Income Taxes Now
“Pay property taxes and state income taxes before year-end to generate the tax deduction,” says Goldstone. This can help you keep your income level down. Additionally, there are other deductions and credits in which your eligibility depends on your income. If you can pay more local taxes now, and bring down the income a bit, you can maintain your ability to claim tax breaks.
You can also squeeze in other deductions now, in order to benefit at tax time. College tuition and mortgage payments can be made early, before December 31, in order to take advantage of related tax breaks.
You might also find yourself close to benefiting from a little more in terms of your charitable contributions if you can squeeze in a little more giving. Look into your bills and expected expenses for the first month or two of the new year and see if paying early could benefit you.
5. Beware Alternative Minimum Tax (AMT)
“If you live in a high tax state and own a home, you are most likely in AMT territory,” says Goldstone. “Run a tax projection to find out where you stand.”
Now’s the time to figure out if the AMT is going to be a problem for you, and then to take steps to minimize the damage. In recent years, the AMT has been increasingly affecting middle class and upper middle class Americans, and it’s important that you pay attention to where you stand, so that you don’t find yourself running afoul of this situation.
Take Action Before Tax Season
The more complex your tax situation, the better off you are getting a little professional help as you evaluate the coming tax season. So don’t wait until tax season rolls around (or even the tax deadline to get here) before you set up an appointment to plan out your portfolio.
Meet with someone now and run different scenarios on your income, investments, and portfolio in order to figure out a way to reduce your tax liability.
When you’re paying a lower tax bill, or even have a small refund to take home after tax season, you’ll be glad you made these year-end money-saving tax moves.
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