Five Year-End Tax Tips
BY: SUSAN POWERS, CFA, CPA, CFP®, CPFA®
As we approach year end, here are five tax tips to help minimize your tax liabilities and make the most of your financial situation:
- Maximize Retirement Contributions by Year-End: Increase payroll deductions now to contribute the maximum allowed to retirement accounts, such as 401(k) or 403(b) plans, IRAs, and SEP-IRAs. These contributions reduce your taxable income and grow tax-deferred or tax-free, depending on the account type.
- Consider a Backdoor Roth IRA: If your income exceeds the limit or making a tax-deductible IRA contribution, you may be eligible to create a backdoor Roth IRA by making a non-deductible traditional IRA contribution and then converting it to a Roth IRA. Be careful regarding the Pro-Rata rule, work with your tax professional ahead of making a decision.
- Harvest Tax Losses: Review your investment portfolio for investments with losses. By capturing these losses, they can be used to offset gains now and carried forward to offset gains in the future. Be sure as well to harvest your losses every quarter as opportunities present themselves.
- Maximize Business Deductions: If you are self-employed, remember that you are most likely not able to itemize deductions personally (less than 15% of taxpayer still qualify to do so). Make all charitable contributions through your business to make these tax-deductible again.
- Use Tax-Efficient Investments: Invest in tax-efficient funds or assets to minimize your tax liability. Municipal bonds, index funds, and ETFs are often more tax-efficient than actively managed funds. If planning to buy an actively managed fund late in the year, beware of capital gains distributions that are typically made in December as you will be taxed on a gain you did not earn.
Keep in mind that tax laws and regulations can change from year to year, so it's important to stay updated and to adapt your tax strategy accordingly. Always consult with tax and financial planning professionals to ensure your tax planning aligns with your specific financial situation and goals.
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