The end of the year is a great time to think about steps that can lower your tax bill. You can do things such as use tax-loss harvesting, move some money into a Roth account, or give to charity. The close of the calendar year gives you several ways to manage your taxable income. If you know what to do before the tax year is over, you may save money and feel less stressed about your finances. Take a look at these simple things that can help you make better financial decisions and use your money well before the end of the year.
If you spend some time looking at your money before the year ends, you may find ways to get tax savings and pay less in tax liability. You could use any capital gains, add money to your retirement account, or give to charity. These things may help with your taxes for the current year. This is a good time to act, so do these things before December 31. It will potentially make your financial plan better and help you have a good tax season.
1. Harvest Investment Losses to Offset Gains
At the end of the year, tax-loss harvesting can help lower your tax bill. When you sell things like stocks that are not worth as much as they were before, you end up with capital losses. You can use these capital losses to offset your realized capital gains. That means you pay taxes on a smaller amount of your gains. You can also take up to $3,000 from your extra capital losses to cut down your ordinary income. This way, you have more options to save some money.
Here’s how you can benefit from this strategy:
- You can use capital losses from your bad investments to offset your realized capital gains.
- If you have more losses than gains, you can also use up to $3,000 of those losses to cut your ordinary taxable income. This can help bring down your tax liability even more.
- It is a good idea to work with a financial professional. A financial professional can help make sure your financial plan stays on track when you do this.
The IRS wash-sale rule means you will not get tax loss benefits if you buy the same or a similar investment within 30 days of selling it. To use your tax loss plan well, you need to plan ahead.
2. Convert Traditional IRA Funds to a Roth IRA
Doing a Roth IRA conversion before the year ends lets you move your money out of a traditional IRA and into a Roth account. When the money is in a Roth account, it can potentially grow tax-free. A Roth IRA conversion will make your taxable income higher for the current tax year. But, there are big long-term benefits. The money you move has the opportunity to grow, and
later, when you take it out, you do not have to pay taxes on it. A Roth IRA conversion can be a good option if you think your tax bracket will be higher in a few years.
This plan can work well for people who have less taxable income this year. Here are some benefits:
- Move your money when you are in a lower tax bracket to lock in a lower tax rate.
- Your investments in a Roth IRA can potentially grow without you having to pay taxes on them.
- Doing this now can lower the amount you have to take out later as required minimum distributions from your retirement plans.
To get the most out of your Roth IRA conversion and lower your tax liability, talk with a financial professional about your particular situation. If you know the tax year rules, you can make this move fit in well with your full financial plan.
3. Maximize Contributions to Retirement Accounts
As the current year comes to an end, it can be a good time to put money into your retirement account. This helps you get tax cuts right away and gives your money the potential to grow more over time. If you make deductible contributions to traditional IRAs, you can lower your taxable income for this year. Adding money to other retirement plans can also help you get more tax cuts.
Some key things to remember are:
- Know the IRS maximum contribution limits for each type of account. For example, if you are 50 or older, and you put $7,000 into an IRA, you can save up to $2,590 in taxes if you are in the highest tax bracket.
- Find out if you and your spouse can get full deductions. This is based on your gross income levels.
- You can keep adding money to your account until tax filing day. This gives you more time to use this plan.
Look at your savings account and think about your retirement goals. Check to see if you are using all the tax deductions you can before this current year ends. This can help you get more from your tax situation.
4. Make Tax-Efficient Charitable Donations
Making planned charitable donations helps you give to the causes you care about. It can also lower your taxable income. This means your tax bill will be less. If you plan your giving well, it can fit with the other ways you use to save on taxes.
Here’s how to optimise charitable donations:
- Give securities that have gone up in value instead of cash. This can let you have bigger tax deductions and not pay taxes on capital gains.
- If you can, think about making a Qualified Charitable Distribution (QCD) from your retirement plans. This lets you give to charity, and you save on taxes.
- Use the annual gift tax exclusion to give gifts to others. These gifts are not taxed, and this can help lower your taxable income.
These ways to save on taxes can help you keep more money. They work best if you want to connect what you earn before taxes to any planned savings. It is good to talk to a tax advisor, so you know your charity aligns with what the IRS wants. A tax advisor can also make sure your gifts do some real good.
5. Review Withholdings and Estimated Tax Payments
Taking a look at your tax withholdings and estimated payments before the year ends is important. Doing this can help you avoid any tax surprises when you file. If you make changes now, you will have a better chance to meet your tax liability and balance the refund you might get with what you need for cash flow. This way, you feel ready and set for the upcoming year.
Start now to make sure your year-end financial decisions do not hurt your cash flow. Talk with your investment manager. This will help you make changes in the best way. A review can keep things stable and work well for you.
Strategies to Optimize Investment Taxes Before December 31
The end of the year is a good time to see how you can get the most from tax-loss harvesting and work with capital gains in the right way. If you talk to an investment manager, you will be able to find ways to match up gains and losses from mutual funds or other investments you have. This can help lower the tax you have to pay.
If you act before December 31, you can use any capital losses you have to save money on taxes for this tax year. A financial professional can help you use these plans in the right way and still keep your long-term goals with your investments.
Identifying Opportunities for Tax-Loss Harvesting
Tax-loss harvesting plays an important role in year-end tax planning. In this process, you sell the investments that are not doing well. This helps you use the losses to lower any capital gains you get throughout the year. As a result, your taxable income can go down.
Focus areas for tax-loss harvesting include:
- Mutual funds that have losses can help balance out gains or bring down your ordinary income.
- Investments that could gain value again, where you might buy them back later if you follow the IRS wash-sale rule.
- Talking to a financial professional can help you make good choices when tax time comes.
You need to do a bit of math and check the way you use your money to see if everything fits with your bigger tax plans. If you spot these chances early and do something about them before the year is over, you can get more out of tax season.
Timing Capital Gains and Losses for Best Results
The timing of your capital gains and losses can be important if you want your tax strategy to help you. If you sell stocks or other things at the right time, you can get capital gains or sometimes use any losses you have to even things out. This plan can help you lower your tax liability, since the IRS lets you do this.
Talking with an investment manager can help you make sure your money plans are right. They help you get ready for the tax year. With good planning, your choices for the year will work well. You can avoid some risks that might not even show up. When you control the time and value of your assets, you get more tax savings. This way, you don’t have extra trouble or feel lost.
Understanding the Wash-Sale Rule and Its Impact
The IRS wash-sale rule is important to know about if you want to use tax-loss harvesting. When you sell an investment for a loss and then buy the same or a lot like it within 30 days, you will not be able to get a tax deduction for that loss. This can make your returns lower.
For easy compliance:
- Look over your portfolio to see if there are any wash-sale issues.
- Plan when to buy investments again so you can avoid extra trouble later or having to change your tax returns in the future.
It is a good idea to talk with a financial professional. This can help you know how the wash-sale rule works for you. You can use this to make smart, tax-friendly choices.
Smart Charitable Giving Approaches at Year-End
Making a plan for your giving before the year ends can bring you joy. It can also help with tax savings. When you give money, it can lower your gross income. This may help you get a tax credit. You can get even more out of this if you give in the right way.
It does not matter if you give appreciated securities or use a qualified charitable distribution. When you make your donations by December 31, you get the most out of the tax effects. A tax advisor can help you make sure your giving is clear and matches your money goals. They will also keep you up to date with the latest IRS rules.
Donating Appreciated Securities for Greater Tax Benefits
Donating securities that have gone up in value, instead of giving cash, can help you get a bigger tax deduction. It can also help you avoid paying capital gains taxes. If you have some securities that are now worth a lot more, this is a good way to save money.
Benefits include:
- You get a tax deduction for the full fair-market value of the appreciated securities.
- You do not have to pay the capital gains taxes that you would owe if you sold the securities.
- This gives you big tax savings on your income taxes.
Talk to your tax advisor before the end of the year. They will help you know if you can get these benefits. A tax advisor can also help you get the most out of your donation.
Leveraging Qualified Charitable Distributions (QCDs)
People who are eligible can get a lot out of using Qualified Charitable Distributions, or QCDs, in their tax strategy. In this way, you can move money right from your traditional IRA to a charity. When you do this, it lowers your taxable income and your yearly tax liability. If you use QCDs before the year is over, you can get even more tax savings. This also lets you meet the required minimum distributions in a way that works with your financial plan. A tax advisor can help you make sure you stay within eligibility requirements and get the most from your charitable giving.
Bunching Charitable Deductions for Maximum Impact
Bunching deductions means you put your donations and other tax-deductible spending into the same year. This helps you save more on your taxes. For example, you can give more during the current year. This way, you plan for what you might spend next year. It can help you get savings.
It is a good idea to pay your medical expenses or other tax-deductible costs in the same year, as long as you follow IRS rules. With the right planning, bunching these costs together can help you cut your taxable income by a lot. This plan can also get you set for next year.
Conclusion
As the year comes to an end, you can take a few smart steps to make your tax situation better. You could sell investments that have lost value to help balance out any gains. Giving thoughtful donations can also help you as you get ready for the next year. Each step here is meant to help you get the most for your tax situation. Planning early can help you pay less tax now and also get you set for later on. If you have any questions or need help with your year-end tax situation, you should talk to an expert. Take charge of your money now!
Frequently Asked Questions
What is tax-loss harvesting, and how does it work?
Tax-loss harvesting is when you sell something you invested in that has lost value. This can help you bring down your capital gains and lower your tax bill. If your losses are bigger than your gains, you can cut your taxable income by up to $3,000. You need to have a good financial plan so you can use this rule the right way and follow all IRS rules.
Who should consider a Roth IRA conversion before year-end?
A Roth IRA conversion can be good for people who feel they will have more taxable income or be in a higher tax bracket later. It is a good idea to talk with a financial professional before you move your money. A professional can help you know if the idea fits with the tax year and with your retirement plans. This helps make sure all things go the right way.
How do charitable donations reduce my tax bill?
Charitable donations can help you lower your taxable income. When you give, you get a deduction that is the same as the fair market value of what you donate. If you use things like Qualified Charitable Distributions, you can bring down your gross income. This means you save money on your tax bill in the same tax year.
What deadlines should I be aware of for year-end tax moves?
Key year-end deadlines include December 31. You need to use tax strategies such as Roth IRA changes and using capital losses before this day. The tax year rules you follow will impact whether you can get a refund or not. If you get ready now, the process will be easier when it is time to file.
Important Disclosures:
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This material is prepared by Midstream Marketing.
