5 important year-end tax strategies you shouldn’t miss

Advisors


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. 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 (such as 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).

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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 (such as the “wash sale” rules.)

3. Contribute to a health savings account. You must be part of a qualified high-deductible health plan to receive the tax benefits of an 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 individual retirement account 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.



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