An article from CNBC, “Lessen your tax bite with savvy year-end strategies,” says that working with a knowledgeable professional who knows what they're doing really helps because they can tailor a strategy that fits with your overall financial plan. It is best to work with an estate planning attorney in your state because state tax laws vary considerably.
Here are some strategies to consider before the end of the year.
Harvesting Tax Losses: This involves selling securities in your portfolio at a loss to offset capitals gains. In a turbulent market, this should be a priority and is particularly important this year for people who own mutual funds in taxable accounts. Portfolio managers may have to sell appreciated securities to meet redemptions. This triggers a capital gains distribution on which investors must pay taxes. Selling other securities in your portfolio at a loss can offset those gains and decrease or wipe out that tax burden.
Catch Up On Contributions: If you haven't maxed out contributions to your 401(k) or 403(b) retirement plan, do so before the year-end to lower your taxable income. Also, if your employer offers a match, take advantage of it. Failing to do this is leaving free money on the table. Other things to take advantage of before the end of the year are "cafeteria plans," which let you withhold some of your pretax salary for certain expenses, and 529 plan contributions.
Charitable Giving: Consider giving stocks that have appreciated. If you bought a stock for $5, and it's now worth $10, you could donate it and get credit for the full $10 (even though you only paid $5), and the recipient charity gets the full value.
Give Your Big Gifts Now: The two types of gift exemptions are the annual gift exemption and the lifetime exemption. Get in your annual gifts before the year is over if you haven't done so already, and then make next year's gifts right away on January 1st to maximize the time the money has to grow in the recipient's account. The article also suggests making larger gifts now (to go toward your lifetime exemption), in case the exemption amount is lowered in the future. One strategy is gifting into a Grantor Retained Annuity Trust (GRAT), which lets you, in effect, loan assets to loved ones, which they pay back with interest. An estate planning attorney can help you with the details.
Settle Estimated Taxes with an IRA: If your taxes aren't withheld through payroll, you're probably paying "estimated taxes," which are due each quarter. If you don’t pay these on time you can be hit with interest charges and penalties. But if you catch up on your payments in the last quarter of the year, you can avoid paying any additional fees if you settle up using IRA distributions.
Don’t delay. These strategies are time-sensitive.
Reference: CNBC (November 17, 2015) “Lessen your tax bite with savvy year-end strategies”