With the year drawing to an end, it’s a good time to start thinking about last-minute moves to get some juicy tax savings. Hey, with the presidential election, there could be important changes to the Tax Code coming. So maybe we should make moves now — just in case?
Definitely.
Besides, when it comes to getting tax savings, it is important to plan and be proactive. Missing a deadline can certainly be bad news.
Of course, the readers at InvestorPlace.com want to get tips about how to deal with capital gains, and especially losses. But there are other areas that can make a big impact, such as putting more dollars into your retirement account or setting aside money for charities. But as should be no surprise, the rules can get a bit tricky.
So let’s take a look at three tax moves you can make before 2016 comes to a close:
Tax Savings Move No. 1: Charitable Donations
Charitable deductions really highlight that you can do well by doing good … but there are some things to keep in mind.
First of all, you must itemize your deductions. You also need to make a donation to an IRS-approved nonprofit organization (so make sure to ask or go to the correct section of the IRS website).
And just in case you get audited, make sure you keep records of your donations, such as with a canceled check, bank statement or credit card statement. Note that if the credit card charge is made on or before Dec. 31, the donation will count for your 2016 taxes.
You can also make donations with property, such as with stocks, mutual funds, bonds or real estate. In fact, these can result in major tax benefits — although, a key is to donate property that you have held over one year.
Why?
To see, let’s take an example: Say that a few months ago, you bought shares of Apple Inc. (NASDAQ:AAPL) for $10,000 and then donated them to a charity. In this case, your deduction would come to $10,000. But suppose you waited for more than a year? In this situation, you would be able to deduct the market value of the shares. So if your Apple position went up by $2,000, then your deduction would be $12,000.
But with a stock donation, you should start the process a couple weeks before the end of the year. Keep in mind that it can take some time for your financial firm to make the transfer.
Also, what if you have stock that has lost value? In this case, it generally is better to sell it and then give the cash to the charity, because that way you can take advantage of the tax loss.
Tax Savings Move No. 2: Retirement Funding
Your 401k or 403b is really something you should not pass on. If anything, your employer may even match contributions — which is essentially a nice bonus.
But the tax benefits are certainly attractive. First of all, the gains are not taxed until you take money out of your retirement account (the idea is that — by that time — you will be in a lower tax bracket).
Next, your contributions are made pre-tax. For example, if you have an effective tax rate of 30% (say for federal, state and local), then an annual contribution of $10,000 will mean not having to pay $3,000 in taxes.
If you do not have access to a 401k or 403b, you can still set up an IRA. In terms of your tax deduction, it is limited to $5,500 (there is an additional $1,000 if you are 50 or older). Yet this is still a good deal. You also have until April 15 of next year to get the benefits for your 2016 taxes.
Tax Savings Move No. 3: Your Portfolio
Have you sold stock for gains this year? Or perhaps you could get a capital gain distribution from your mutual fund (which comes in December)?
If so, you may want to offset some or all of this by selling your losers. This is known as “tax-loss harvesting.”
Granted, if you make a lot of trades in your accounts, this process can get a bit tedious — but it is still worth doing.
Yet this does not mean your decisions should be solely focused on taxes. Hey, perhaps you have a biotech stock and there may be an FDA decision soon. In other words, it probably does not make sense to unload it right now since you could miss out on a big gain.
Something else: Even if you do not have gains this year, you can still benefit from tax-loss harvesting. This is because you can deduct up to $3,000 in capital losses — per year — against your ordinary income (any additional losses can be carried forward to future years).
And finally, if you are in the 10% to 15% tax brackets, some or all of your long-term capital gains may be tax free!
So to get an estimate on the tax impact of a stock sale, you can check out the following online calculator.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own tax preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
