5 Year-End Tax Strategies You Don’t Want to Miss

The end of the year can be a hectic time. With the holiday season in full effect, we find ourselves cooking, shopping, and entertaining friends and family. But one thing many people forget about is taxes. While there is plenty of time after the holidays to prepare your taxes, some of the best tax strategies you should be considering must be implemented before the last day of the year. Here are five things you may want to consider before year-end to help reduce your tax liabilities now or in the future:

1. Set Donations Aside With a Charitable Remainder Trust (CRT) 

There are great tax incentives for charitable donations. However, many people don’t take advantage of this tax benefit because they believe the money must be given away immediately. With a charitable remainder trust, you can maintain control of the asset and take income from it while you are still alive. At the same time, you will enjoy a tax deduction in the year you transfer the asset to the trust even though the charity doesn’t receive the funds until you pass away. And, as an added bonus, you can transfer highly appreciated assets (like real estate or stocks) and sell them within the charitable trust without realizing an immediate capital gain. This means you can use this strategy to sell investments with a lot of unrealized growth and spread the capital gains taxes owed (potentially reducing the total taxes paid on those gains).     

2. Offset Capital Gains Taxes With Tax-Loss Harvesting

This strategy involves realizing gains or losses (or both) in your investment portfolio for tax purposes. If this is done properly, the investor can minimize the taxes paid on capital gains and maximize the tax benefits of capital losses. This can also help reduce future tax liabilities, which is a concern for people who think their capital gains taxes may be higher down the road. But be careful; there are a number of rules you must pay attention to when it comes to tax harvesting (like the “wash sale” rules). (For related reading, see: Pros and Cons of Annual Tax-Loss Harvesting.)

3. Contribute to a Health Savings Account

You must be part of a qualified high-deductible health plan (HDHP) to receive the tax benefits of a health savings account (HSA) contribution. But if you do qualify, this is one of the best tax advantages available. The tax deduction is an above-the-line deduction similar to an IRA contribution. However, unlike an IRA, the funds can be taken out tax-free if they are used for qualified medical expenses. This means you receive the tax deduction upfront, the money grows tax-deferred, and it comes out tax-free for qualified medical expenses. 

4. Convert Retirement Account to a Roth IRA

It is never easy paying more taxes than you need to. But for people in lower tax brackets who believe their tax rates may be higher in the future, Roth conversions can make a lot of sense. Partial conversions are allowed, meaning the entire sum of the retirement account does not need to be converted. This means you can calculate the exact amount that should be converted each year to minimize the taxes due. Also, the taxes owed on the conversion can be offset using some of the strategies discussed above. Remember, all the growth in a Roth will be tax-free if the rules are followed properly. This can be very powerful if/when taxes are higher in the future.  

5. Take Advantage of Tax Forecasting

Everyone has a unique tax situation. By working with a professional who can offer tax forecasting software and services, you can clearly see the net effect of implementing some or all of these strategies. A tax forecast is an extremely valuable tool that should be used near the end of the year to help you make educated decisions on your tax plan.

December can be a busy time of year and it is always easy to procrastinate, especially when the subject is taxes. But for some people these strategies could mean thousands of dollars in tax savings. And after all the holiday spending, that extra money in the beginning of the year can be even more important. So, don’t wait any longer—all of the strategies discussed here need to be implemented by the end of the year.   

(For more from this author, see: How to Manage Risk With Bonds in Your Portfolio.)

 

Disclosure: Kinetic Financial & Insurance Solutions, Inc. and Kinetic Investment Management, Inc. are two separate entities. Insurance products and services are offered and sold through individually licensed and appointed agents in all appropriate jurisdictions under Kinetic Financial & Insurance Solutions, Inc. Investment Advisory Services are offered through Kinetic Investment Management, Inc., a registered investment adviser.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.