The year is quickly drawing to a close but there are still a few moves you can make to save some real money this year and set yourself up for tax saving success next year. Here are 3 of my favorite maneuvers:
1. Tax Loss Harvesting – Turn Unrealized Losses into Real Losses for Some Juicy Tax Benefits
Pull out the investment statements for your non-retirement accounts. Let’s say you have investments are worth less now than your cost basis. In that case, you are sitting on a paper loss. But if you sell those investments, you’ll turn that paper loss into a realized loss. You can use those losses against all other realized capital gains. If you don’t have any capital gains to offset that tax loss, you can use up to $3,000 of that loss to reduce your taxable income.
If you really like the investment and are hesitant to sell, don’t lose your cool Pilgrim. You can always buy it back after 31 days. (If you buy the exact same security within 31 days of selling it, you’ll violate the “Wash Sale Rule” and the tax loss will be disallowed.) If you invest using funds or ETFs, you can buy a very similar fund the same day you sell the old security. That way, you’ll be able to claim the tax loss and still protect your position by not being out of the market. 🙂
2. Income Tax Projection
You probably did some tax planning throughout the year. But during the year it’s hard to really know what your tax liability and effective tax bracket are ultimately going to be. This is especially true if you receive commissions, self-employment income or bonus bucks at work.
Now that the year is just about over you probably have a better handle on how much income you’re going to report. Give your tax preparer a call now and make sure you’ve made the appropriate tax payments. If you underpaid your taxes you can make it up before 12/31. This way, you’ll avoid nasty tax penalties.
3. Withholding Tax
Along the same lines as the point above, try to make some projections about what you think you’ll earn next year. Make sure you have the appropriate withholding tax set up at work. While you’re at it, review your retirement contributions. You still have time to pour a ton of dough into your retirement plan if you haven’t already taken advantage of the maximum allowable contributions. But think about next year too. If your income will be higher, you may be able to increase those retirement contributions. It’s worth your consideration.
(You probably won’t be able to do this until at least the first week of January, so make yourself a reminder now in case you forget. You should discuss both withholding tax and income tax projections with your tax advisor.)
What other year-end tax moves do you suggest? Please leave a comment below and help all the Pilgrims save a few Pesos this year.