Here are a few year-end planning ideas to discuss with your advisor:
1. Review your portfolio.
Sounds simple enough, but after the past few years of rising or steady stock markets and falling or steady interest rates, it makes sense to review your holdings to make sure you still have the mix of assets that you think are prudent. Ideally, you do not want to recognize gains late in the year, because doing so may require paying capital gains taxes a year earlier than if you waited until after Jan. 1. However, if your portfolio hasn’t been rebalanced and you find yourself in a significantly riskier investment profile due to extraordinary gains in a particular asset class, rebalancing now may make the most sense.
2. Harvest capital losses.
You may want to delay harvesting gains until 2016, but if you have investments that have dropped in value, selling them now may allow you to offset gains you have realized throughout 2015. If the investment is something you want to own in the future, however, be aware of “wash-sale” rules that prevent you from buying a “substantially identical” investment within 30 days. Your advisor can help you navigate this process.
3. Maximize 2015 tax breaks.
Individuals and business owners have many opportunities to reduce their tax bill, but most require action before year-end. If you qualify, you may want to increase tax-deferred retirement plan contributions, take advantage of Section 179 business-expense deductions, or take advantage of many other tax credits and deductions.
4. Make gifts.
Annual gifting is a great tool for wealthy families looking to minimize estate taxes. Individuals can make tax-free gifts of up to $14,000 to an unlimited number of people in 2015 and a married couple can jointly give up to $28,000 to each person.
5. Confirm your Required Minimum Distributions from retirement plans.
If you are older than 70 ½, you have to take distributions from your retirement plans each year. The penalties for not taking enough are significant and the rules can be complex, so check with a financial professional to ensure you are taking out the right amount in 2015.
6. Donate to charity.
Charitable gifts are a win-win: they support your favorite causes while providing you with a generous tax deduction. Cash gifts are most common, but donating property that has appreciated in value – stocks, real estate, jewelry, or artwork, for example – has the added benefit of helping you avoid paying taxes on the appreciated value of those assets.
7. Check your Health Savings Account balance.
If you work for a company that offers you the opportunity to put money aside before taxes to pay some of your health care costs not covered by your plan, make sure you end the year with a zero balance. Any remaining balance will not carry over to 2016, so if you haven’t used it, you’re going to lose it. Instead of letting the money you have set aside go to waste, you may want to spend it on discretionary, qualified purchases. For example, buy another pair of prescription glasses. The amount of dollars you save may not compare with some of the ideas above, but your alternative is a guaranteed loss of all of the residual balance in your account.
8. Consider delaying additional mutual fund purchases in taxable accounts.
With equity and fixed income markets near their all-time highs, many mutual funds have embedded capital gains, profits on individual stocks or bonds that haven’t been distributed to shareholders yet. Many funds make distributions late in the year, so if you buy an appreciated fund today, it is possible to find yourself paying taxes in 2016 on gains that you never enjoyed. You are actually paying taxes on other shareholders’ profits! Your advisor can help you analyze funds to ensure that those you are buying do not have this exposure. Alternatively, you could buy individual securities or Exchange Traded Funds, since these do not carry embedded capital gains.
Some of the ideas above may save you a lot of money. Others may save you just a few dollars. Either way, reviewing your options now is a worthwhile exercise so that you can go into 2016 knowing that you have taken advantage of every money-saving opportunity that 2015 had to offer.
» Mark Blackwell is a Certified Wealth Strategist® and the Mississippi Area Executive for Regions Private Wealth Management. He can be reached at firstname.lastname@example.org.
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