The end of the year is a time for planning and strategy for investors, which is why it’s important to be up to date with the best tax strategies to apply. These are measures you can take at the end of every year to make sure you’ve done everything in your power to protect your hard-earned gains.
To give you a boost, we studied the market and managed to select some of the most recommended tax strategies by specialists. However, before you decide to apply any of these strategies, it’s important to make sure they fit the specifics of your situation, as things can be different from one state to another.
So, if you’re looking to maximize your after-tax return in the following year, have a look at the techniques and strategies mentioned below.
Keeping up with the Computations
This is a simple step, but being organized is often overlooked. The end of the year should be reserved for running the numbers, and this is especially true for investors. This is the first key step to allow investors to dissect their income and expenses for the past year, before then applying the necessary strategies in order to minimize their potential tax liability.
If you don’t have the time or resources, this is the moment to consider engaging with a professional like a CPA. They can help with gathering information on the actual income to date and to make an estimate for the income that will be generated until the end of the year.
Furthermore, someone specialized in working with income and expenses can help identify any tax return deductions. This is especially important for investors since the Tax Cuts and Job Acts of 2017 eliminated the possibility to deduct investment related expenses.
Once you know the actual and estimated income and expenses, it should be rather easy to make an estimate of your tax bill and if there are ways to lower it. It’s also important to note that married couples have the possibility of filing separately or jointly, so make sure to analyze each situation and choose the most beneficial.
Offset Earlier Gains by Selling at A Loss
This is a strategy applied by many investors to offset gains with losses. Right now, the tax code allows investors to apply an annual deduction against ordinary income (salary for instance) if they register a net capital loss of up to $3,000.
So, to apply this strategy, investors will set to produce the right amount of loss before the end of the year. As a hypothetical example, if you own shares in a mutual fund, and their value is holding steady, you could sell enough to make that $3,000 capital loss. The good news is that you will still own the same value, but it will be in a different format after the sale. You’ll have both shares and the cash registered from the sale, but as a result, you will have a smaller tax bill because of the registered loss.
While the law prevents you from repurchasing the shares you sold within 30 days, no one stops you from using the money to purchase shares in a similar fund that uses a similar investment strategy. Similarly, if you sold securities, you can buy different ones in companies that operate in the same line of business.
You can also try repurchasing the shares/securities you sold after the 30-days period, but you risk an appreciated stock that may no longer be satisfactory for your needs.
Make sure your Portfolio is Balanced
A well-balanced portfolio should promote proper diversification in bonds and stocks, but it’s difficult to maintain perfect balance throughout the year. This is why most serious investors do a re-balance of their portfolio at the end of the year.
Now, the most recommended technique when it comes to establishing the desired balance of your portfolio is by selling some of the investments. Since the year-end is close, it is smart to find those investments that are bound to produce the most tax benefit and identify them for sale.
Another technique that’s used often by investors, approaches the difference between taxable investments and tax-deferred retirement accounts (such as IRAs or 401(k)s). Since distributions from these accounts are taxed at higher regular rates, by moving interest-paying investments into tax-deferred accounts, you can obtain tax-free compounding.
Support the Community
Another way to lower your final tax bill is by donating securities or cash to charity. Yes you need to contribute some form of asset, but anything that goes towards supporting charity can be deducted at full market value, which means you won’t have to pay capital gain tax for these securities in the future.
If you have family members that are in a lower capital gains tax category, you can reallocate appreciated long-term gain securities towards their account. It’s true that you won’t see the cash in your account, but you will be supporting a family member in need and lower your tax bill.
It may not be the most ideal way to reduce tax expenses but it’s a wonderful way to give back to the community and make sure everyone comes out of the year on their feet.
The techniques mentioned above have their limitations and should not be followed without the advice of a specialized financial consultant. While it’s true there are ways to protect your hard-earned money from financial institutions (like the IRS), it’s also important to make sure you follow all the rules in place.
Finally, you should know that each investor’s situation is unique and only certain terms apply at any given time. So, it’s best to make sure you understand each move you make, since you will be bearing the responsibility should things go wrong.
Also, these are not the only techniques investors can use to reduce their tax bill, so it pays to do your homework and identify as many advantageous situations as possible. After all, as an investor, you are already accustomed to analyzing the market and understanding how the financial world is governed, so why not use some of this knowledge when it comes to taxes?
This article comes to us from Ken Boyd of Accounting Institute for Success
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