If you aren’t vigilant, Uncle Sam has a way of taking a big bite out your portfolio.
And while it’s still the dog days of late summer, in my opinion, it’s not too early start thinking about steps to take before 2017 winds down.
Here are some tax tips worth considering to help minimize the tax hit to your hard-won returns.
If you have some losing positions, you might want to consider a common practice called tax-loss harvesting.
The basic idea is to sell losing investments before year-end to reduce the tax liability on capital gains on your winning investments.
Should you decide to buy back the security later, make sure you consult with a tax attorney first.
The IRS does not allow dumping a stock for tax purposes and turning immediately around and buying it back, a so-called wash sale.
There is usually a waiting period depending on the investment involved.
You might also consider checking into whether your mutual funds or ETFs are making capital gain distributions before yearend.
Oftentimes a fund manager will decide to sell a stock to lock in profits or to raise cash for shareholder redemptions.
In such cases, the fund will then distribute at least 95% of the gains to shareholders and that’s a taxable event.
That same advice also holds for dividends. Check out the dates your fund is scheduled to pay out dividends.
If you hold a fund that will pay a dividend before December 31, you may want to do some math.
Compare the tax hit of recognizing a dividend payout against the capital gain tax hit you would absorb should you sell off the entire investment.
If the fund has already delivered handsome returns and you were thinking of selling at some point anyway, it might make sense to unload the investment in 2017, and before that dividend distribution, to lower your tax bill.
If you plan to max out on your contributions to your 401(k) or an IRA to save on a tax-deferred basis and lower your 2017 tax bill, now is the time.
Contributions to your 401(k) or other retirement plans need to be made by December 31. The 2017 contribution limit is $18,000.
Writing a check to a charity is a tried and true tax savings strategy late in the year.
However, some investors also opt to donate stocks and bonds to a worthy cause.
The tax advantage is two-fold: You can deduct the current market value of the asset from your taxable income and don’t have to worry about paying any tax on capital appreciation that you may have accumulated.
With a little bit of effort and planning, you may be able to lower your 2017 tax bill.
Why leave money on the table if you don’t need to?
DISCLAIMER: The information contained in this article is general in nature and not intended as specific tax advice. The specific tax-related tips discussed in this article may not be appropriate for the circumstances of all or any readers. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article.
- Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.