November 22, 2017

5 End-of-Year Tax Planning Tips

The end of November means turkey dinners, time with family, and (of course) year-end tax planning! Here are five things you can do in under fifteen minutes to make tax-efficient use of your dollars at the end of the year: 

  1. Think twice before buying mutual funds in your taxable accounts in November and December. Mutual funds make and report capital gain distributions to shareholders (that’s you) in the fourth quarter each year. If you intend to buy mutual funds in a taxable investment account, check with the fund company for the taxable gain information and then wait until after the gains are paid out, if possible, before purchasing shares. This strategy is irrelevant in tax-deferred accounts.
  2. Consider selling assets in taxable accounts that are being held at a loss. Tax losses can be used to offset gains and as a deduction of up to $3,000 from taxable income each year. If you have a taxable investment account, look to see a schedule of unrealized losses and gains. This schedule should help identify which holdings may be good positions to sell.  The rules around harvesting losses can get a little tricky, so consult your accountant or financial advisor before proceeding if you have questions. Unused losses may also be carried forward to future years.
  3. Give your appreciated stock and mutual funds to charity instead of cash. If you intend to write a check in excess of a few hundred dollars to a charity, and if you have a taxable investment account, consider giving away appreciated assets instead of cash. The reason? Charities do not pay capital gains tax upon the sale of the securities while you still receive an income tax deduction for the market value of the security. So – leave the cash in your bank account and contact your financial advisor; he or she should be able to facilitate this tax-efficient transfer on your behalf.
  4. Increase your 401k contributions if you have not yet reached the annual limit. If you have a little bit of extra cash in the bank to live off of, and if you have access to an employer-sponsored retirement plan, consider upping the contribution amount from your last couple paychecks of the year. Most retirement plans will allow you to change the contribution amount regularly. If you’ve contributed under $18k to your 401(k) in 2017, and if you can afford to do so, consider putting 10, 20 or even 30% of your December paychecks aside. Just remember to adjust that contribution level back down a little in the new year.
  5. Increase group disability and life insurance levels through employer-sponsored plan. Many companies are in the heart of open enrollment for benefits (or they are about to be). If your employer is in an open enrollment period, consider increasing the insurance you purchase each payroll cycle. These policies are often issued without underwriting and are based on a fairly inexpensive salary multiplier formula. These policies can be a great way to pick up cheap insurance with minimal hurdles.