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Why “Tax Time” Is Now—And You Should Do These 10 Things in November or December


The end of the year isn’t just the time to get ready to fill out your tax return—it’s a time for tax planning, too…if you want to pay less!

This year, there’s a lot of uncertainty over the proposed huge tax overhaul in Congress. But you can make the following 10 tax moves this year regardless of what changes may occur…

  1. Preparing a tax projection can give you a heads up on where you stand and what can be done before the year ends. Compare your returns from the past three or four years, line by line, to get a better understanding of how your income tends to be taxed and where your expenses are going.
  2. Adjust withholding and estimated taxes for next year based on your projections. Close management can assure that you do not overpay, resulting in giving the government more of your money to work with, nor underpay, which could subject you to penalties.
  3. If you are self-employed or earn any self-employment income, consider making the maximum contribution possible to tax-deductible retirement accounts or tax-free Roth IRA or 401k accounts. Otherwise you may be wasting a powerful tax break.
  4. If you are employed and your employer offers a 401k with a matching element, at least contribute the most you can to get the maximum match.
  5. You should try to maximize the allocation to flexible spending or cafeteria plans if they are offered by your employer. This will provide “tax deductions” on money that would otherwise be fully taxed.
  6. Get out of investments in publicly traded partnerships that are insignificant to your total wealth—and you’ll stop getting the related 10-plus-page K-1 forms that complicate your tax preparation and can also delay your filing if they are sent late.
  7. Manage your asset location. Many people own tax-free municipal bonds in taxable accounts while holding stocks in retirement accounts. If instead you hold stocks in taxable accounts, you can get the dividend and capital gain tax benefit (which is not available in retirement accounts) and you can invest in higher yielding corporate bonds in the retirement accounts.
  8. You can get a full charitable deduction by contributing long-term appreciated stocks to a recognized charity and not have to recognize the gain. But a better strategy is to contribute this year to a donor advised fund an amount that would be equivalent to what you would ordinarily contribute next year. You will get the deduction now, and you can direct the fund to distribute the funds next year to your charities using whatever timetable you wish. Donor-advised funds are very easy is establish and usually have minimal costs–check with your tax advisor.
  9. People who must take required minimum distributions (RMDs) from their IRA accounts who are eligible for the standard deduction can direct some of their RMD to go to a charity. This will in effect provide a deduction for the contribution by way of reduced income from the IRA and for which they would not have been able to deduct the contribution because they could not itemize. This will also reduce their adjusted gross income (AGI), which could reduce the amount of Social Security that might be taxable and increase deductions that might be limited by the size of the AGI. This could be a valuable strategy if the proposed legislation increases the standard deduction for next year.
  10. Manage your capital gain taxation. If you have gains, then to the extent possible sell losers to reduce the tax on the gains. If you want to get the tax benefit but do not want to dispose of any stocks, consider selling and immediately buying an index fund with a similar market risk as the stocks you sell, and then wait 31 days and reverse the transaction by selling the index fund and repurchasing the individual stocks. This, along with everything else referred to above, should be checked with your tax advisor beforehand to make sure you are clear on the strategy and its applicability to you.

For many people, income taxes are one of their top three expenses.  Next year—and every year thereafter—don’t just wait until yearend to plan. Make planning a perennial process, and you’ll make yourself richer!

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