The holidays are usually filled with shopping, cooking, and festivities. Don’t let the holiday season pass without stopping to make strategic saving and investing decisions. It’s important to do so before December 31 as it can affect not only your long-term ability to meet your financial goals, but also the amount of taxes you’ll owe next April.
The end of the year is a perfect time to reflect on your financial life plan. Have you had any life changes over the past year? It is a great time to factor in any changes you may have experienced in family budget, insurance policies, and estate planning documents. All of which are an important part of your financial life plan.
The end of the year is also a time to consider the tax consequences of any capital gains or losses you have experienced throughout the year. Though tax considerations should not be the primary driver of your investment decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.
If you have realized capital gains from selling securities at a profit and have no tax losses carried forward from previous year, you can sell losing positions to offset being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for married filing separate) or carried forward to reduce your taxes in future years.
However, it is important to note that if you are selling to harvest a loss in a stock or mutual fund and intend to repurchase the same security, you must wait at least 31 days before buying it again. Otherwise, the trade is considered a “wash sale” and the tax loss will be disallowed.
It is important to consider how long you’ve owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, your ordinary income tax rate could be much higher than the long-term capital gains rate, which applies to the sale of assets held for more than a year.
An often overlooked tax and charitable benefit if you are over age 70½ is donate your Required Minimum Distribution directly to a qualified 501(c)(3) institution eligible to receive tax-deductible contributions. This will avoid the payment from being included as taxable income on your tax return.
This time of year is also ideal to sit down and review your overall portfolio and goals. If you are nearing retirement it is crucial to put plans in place to ensure you are on the right track. Struble and Company Financial Life Planners are here to help you, feel free to give them a call at 931-410-3030 to set a free review of your financial life plan.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.