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Smart Moves for Year-End Tax Planning

There is still time to make some money-saving financial decisions.

The end of the year leaves many investors wondering if there is anything they could still do to save money on their 2020 tax bills. Luckily, they have time to make some financial decisions to help ease their tax burden.

Review Capital Gains: Capital gains occur anytime one sells an investment for more than one paid to purchase it. The tax that is due depends on how long the investment is held, and how much income one earns. Not every investment is a winner. For investors who have unrealized losses in their portfolios, they may want to consider selling those investments to realize a capital loss. Capital losses can offset any gains that have been already realized this year, and up to $3,000 of net losses can be used to offset regular income. Any excess can be carried forward to future years to reduce future gains. 

Maximize Your Contributions to Tax Sheltered Accounts: Contributions to a workplace retirement plan (subject to limitations) reduces taxable income, therefore lowering tax liability. If you are self-employed, you can establish a SEP IRA or Individual(k) to defer up to $57,000 of income (subject to limitations). In addition to workplace retirement plans, you can also make contributions to a Traditional IRA and potentially receive a tax deduction. 

If you are enrolled in a High Deductible Health Plan, you are also eligible to contribute to a Health Savings Account, which, like an IRA, offers a tax deduction for contributions and offers potential tax-free growth until funds are withdrawn for eligible healthcare expenses. 

Make Charitable Contributions: If you itemize deductions, keep track of your contributions to charities as they can be used to offset your income. If contributing to charity, consider donating stock that has appreciated to boost the value of that tax deduction. When you donate appreciated stock, you will avoid eventually realizing capital gains and will still receive a deduction for the value of the stock. If you have to take a Required Minimum Distribution from your IRA accounts, you can also make a Qualified Charitable Distribution directly to the charity so that you satisfy the distribution requirement and the distribution is not realized as income. 

Accelerate Expenses: You can accelerate certain expenses such as making your January mortgage payment before year end to realize the mortgage interest as a tax deduction. You can also prepay two quarters of next year’s property taxes (be careful not to exceed $10,000 in state and local taxes as the deduction is capped at $10,000). Business owners should always review their expenses towards year end, especially in a good year, to see if they have any expenses that they can consider accelerating into this tax year to offset more income. 

About the Author 

Bradley Bofford, CLU®, ChFC®, CFP® is managing director, partner, at Hightower 
Financial Principles in Fairfield. 

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