Tax Moves You Can Make Before the End of the Year

Photo: Flickr.com/Ken Teegardin

While it may seem early to be talking about taxes – we did just finish eating massive amounts of turkey, stuffing and other Thanksgiving foods – the time to think about and plan your taxes for the year is before December 31st, not after. Minimizing your taxes requires some thought but can really pay off in the form of money back in your pocket. Here are some things that you can do to help minimize what Uncle Sam takes from your income.

Capture Tax Losses

If you’ve sold stocks this year that you had held for a while, you likely made some money, which will trigger capital gains tax when you file. You can use losses on other stocks to cancel out the gains and reduce your capital gains tax. And if you (unfortunately) have more losses than gains this year, you can use $3,000 of the excess losses to offset your other income and roll the rest over to next year.

Donate appreciated stock to charity

Rather than donate cash to our favorite charity, you can donate some of your investments instead. There are two benefits to this. If you sell the investment first and then donate the money, you’ll have to pay capital gains tax on any appreciation. Second, you get to deduct the full amount of the investment, as valued on the date of the donation.

Keep in mind that this is only useful if you itemize deductions. If you take the standard deduction, charitable contributions don’t affect your taxes. If you’re right on the border with the standard deduction, it may be worth your while to shift your deductions into a single year by either front-loading or deferring your contributions.

For those of you that are over 70-1/2 years old, and therefore on the hook to take a minimum required distribution (MRD) from your retirement accounts, you can take advantage of Qualified Charitable Distributions. In this case, the donation to the charity is a direct transfer from the retirement account and counts towards your MRD, but not towards your income for the year.

Contribute to an IRA

For those of you who aren’t taking distributions from retirement accounts, and if you have earned income and can afford it, make sure you make your annual contribution to your Individual Retirement Account (IRA). You’ll get tax-deferred growth and you may get to deduct the contribution. Remember: all those reinvested dividends will grow tax-deferred!

Take Advantage of the Gift Tax Exclusion

If you have invested in dividend growth stocks over a lifetime, you probably have a decent net worth. If you have family to whom you want to give gifts, you need to keep in mind the gift tax exclusion. Under the gift tax exclusion, any person can give a gift up to $14,000 in any year to any other person and not be liable for gift tax. This means that a married couple can give up to $28,000 to a child or grandchild without any tax liability. (Note that the tax liability is on the giver, not the recipient. And going over the limit affects your lifetime gift-tax exclusion, which is a whole separate limit.) The annual gift-tax exclusion resets each calendar year, so gifts made on December 31st and on January 1st are separate – which means that, if the gifts are timed properly, that married couple can give up to $56,000 to a child or grandchild in a very short period of time.

So that’s just some of the things you can do now to lower your tax bill next year. The tax laws are complicated, so be sure to get professional advice as you plan for next year’s taxes.

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