Tax day may be four months away, but taking care of a few things this month can put things in order before your 2016 filing. Why now? In some cases, you’ll need to act by December 30 to meet year-end deadlines. You should also have a good idea where your annual income will stand, and therefore your marginal tax bracket. That can help you know if it makes sense to act now or to wait until next year.
To help you prepare, Regional Investor Center Manager Brent Hoskins outlines tax considerations he reviews with clients before year end. “When looking at your financial plans as a whole, it’s important to factor in taxes,” Hoskins says. “While taxes shouldn’t be your only consideration, understanding their impact can help you make more informed decisions.”
Tax Decisions to Make Now
This list of tax reminders might help reduce what you owe or increase your refund.
1. REVIEW POTENTIAL GAINS AND LOSSES.
When it’s time to take money out of your taxable investments, you’ll have either a capital gain or loss depending on whether you made or lost money with your sale. Selling with a gain means you’ll owe additional taxes on the amount over your cost basis. You might be able to offset gains by selling other investments at a loss. If it makes sense to sell securities that have lost value, consider that option as a way to lower your tax bill.
2. NOTE THE TRADE DATE FOR PORTFOLIO REBALANCING.
If you plan to rebalance your portfolio, transactions in a taxable account will trigger a gain or loss for each account. Keep in mind that the trade date of your transactions determines the year in which potential taxes will be due. Also, be aware of year-end distribution dates. Purchasing new shares on or before the dividend date means you also receive the funds income and capital gain payments, if any.
3. DETERMINE WHEN TO TAKE A ROTH CONVERSION.
If you’re considering converting part or all your Traditional IRA to a Roth, you’ll owe taxes on any contributions and earnings not previously taxed. You’ll need to decide if you want to pay taxes on the conversion this year or postpone that until next year. To spread the taxes over multiple years, you might want to do a partial conversion.
4. CONTRIBUTE TO YOUR RETIREMENT ACCOUNTS.
Whether you contribute in a Traditional or Roth IRA, you benefit from tax-advantaged investing. While IRAs allow you to make 2016 year contributions until tax day, making contributions earlier means more time in the market and for your dollars to grow. Take note: If you’re eligible, you might be able to take a deduction for contributions to a Traditional IRA.
5. REVIEW TAX WITHHOLDING FOR REQUIRED MINIMUM DISTRIBUTIONS (RMDS).
If you’re over age 70 ½ and taking required distributions, take note of the tax amount being withheld with each redemption. The default withholding is typically ten percent, but you can increase the amount if you choose. Adequate withholding can be especially important for avoiding underpayment if you’re making quarterly tax payments. Don’t forget, any RMDs not taken by December 30 could be subject to a 50 percent penalty.
6. MAKE 529 PLAN CONTRIBUTIONS.
Unlike IRA contributions, purchases into 529 Education Savings Plans must be made by year end to take advantage of the state deduction for 2016, if applicable. Anyone— related or not—may be able to take a deduction for contributions to your student’s account, depending on their state’s tax laws.
7. REVIEW EDUCATION EXPENSES.
If you have a student in college, you might be able to take deductions for education-related costs. Review your anticipated income to determine if when you want to spend the money now to take advantage of those deductions this year or wait until 2017. You may also be eligible for educational credits, such as the American Opportunity Tax Credit and the Lifetime Learning credit.
8. CONSIDER CHARITABLE DONATIONS.
Donating your taxable investments presents a win-win situation for the qualified organization of your choice and you. When you donate securities in-kind, you don’t pay taxes on the appreciation and you may also receive a deduction. Refer to the IRS web siteor talk to your tax advisor for details.
9. KEEP GIFTING LIMITS IN MIND.
If you’re planning to reduce your estate by making gifts to family, take note of the annual exemption. As of 2016, the IRS allows you to give up to $14,000 per person per year without incurring gift taxes. You can still give more than the limit per year to an individual and not incur gift tax, but you must report it and count it towards your lifetime exemption amount.
Put Tax Savings Toward Your Investment Goals
Looking ahead has its benefits. Early tax planning lets you make money-saving decisions before time runs out. And, the more money you save from taxes, the more you have to invest toward your investment goals.
Find more tax-planning help in our Tax Center.
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