5 Year-Round Tax Strategies

  • Learn why good tax preparation and planning starts at the beginning of the year, not year-end.
  • Consider these timely ideas that may cut your tax bill next year.
  • Recognize the importance of involving tax and investment professionals in your financial decisions.

Think about your tax liability earlier rather than later

If you typically put off thinking about your tax situation until next January (or later), your procrastination may well be costing you. The fact is this: Thinking about taxes well ahead of December 31 may allow you to take steps to help reduce the amount you send to the IRS next year.

Thinking about taxes well ahead of December 31 may allow you to take steps to help reduce the amount you send to the IRS next year.

Reviewing your finances and the investments in your portfolio throughout the year will not only help you keep on top of important deadlines, it will also likely save you money.

5 timely ideas that may cut your tax bill

1. Give gifts to help increase deductions. If you itemize deductions, making charitable gifts before year-end may reduce your tax bill. Keep in mind cash contributions to charities must arrive by December 31. For contributions by check, the date you mail or deliver it will be considered the date of the gift. If you’re making a charitable contribution to a gift fund, the account must be open and the deposit complete before December 31 to qualify.

For even greater tax savings on charitable gifts, consider giving stock rather than cash. If you have highly appreciated stock that you have held for more than one year, you can donate the stock, avoid tax on the capital gain, and receive a tax deduction.

Finally, don’t forget to keep records of any clothing or household items you donate to charity throughout the year. These items can add to your tax savings too.

2. Save on taxes while saving for education. Contributions you make to an Education Savings Account (ESA) or a 529 plan grow on a tax-deferred basis. This means you do not pay tax on any gains or income received while the assets are held in these accounts. When you are ready to use these savings you may withdraw the balance tax-free if properly used for qualified education expenses.

3. Contribute to your employer-sponsored plan to reduce taxable income. If you’re not putting the maximum amount allowed into your employer’s 401(k) or 403(b), consider increasing your contributions as soon as possible. The maximum you can defer into these plans for 2016 is $18,000 ($24,000 if you’re age 50 or older). The deadline to make these contributions for this year is December 31. If you’re able to participate in a nonqualified deferred compensation (NQDC) plan at your employer, you may want to boost the amount you’re contributing.

If you’re not putting the maximum amount allowed into your employer’s 401(k) or 403(b), consider increasing your contributions as soon as possible.

4. Take advantage of employer benefits. Many employers offer tax-advantaged benefit programs that allow you to set aside savings for medical expenses or dependent care expenses. During your annual benefits enrollment or at a qualifying life event you may choose to contribute to a Flexible Savings Account (FSA). You are not taxed on the portion of your wages you direct to an FSA when the account is properly used for medical or dependent care expenses. Paying child care costs using an FSA can be an effective way to reduce your tax bill. Check with your employer to learn more about these benefits.

5. Consider selling investments that haven’t met expectations to realize capital losses. In general, you can use capital losses to offset capital gains, thereby reducing how much you owe the IRS. In addition, if you have capital losses leftover after you offset your capital gains, you can use up to $3,000 of them to reduce other types of taxable income. If you have more losses than that, you can carry them over to reduce your income in future years.

When to sell

To deduct your losses, you have to “realize” them by selling investments. But before you sell, ask your advisor for a realized and unrealized gain/loss report to assess how much additional income and/or capital gains you should expect and how to manage that income. Then talk with your tax and financial advisor about near-term portfolio moves to help lessen your tax burden. This is a tax strategy you can use all year, not just at year-end.

If you want to realize a loss on an investment you want to hold on to, the simple solution is to sell your position, thus realizing the loss, and then repurchase the same investment. While you certainly can do this, you have to be careful to avoid violating what’s known as the “wash sale” rule.

The wash sale rule won’t let you claim a current tax loss if you buy (including through dividend reinvestment) the same or substantially identical security within 30 calendar days before or after the trade date of the sale that established the loss (a period of 61 calendar days).

Rules of selling

It’s important you understand how and why your investments can affect your taxes.

The lesson here is to wait more than 30 days before you repurchase the investment or, if you’d rather not wait to purchase the same investment, you can buy something that’s similar but not substantially identical to what you sold.

Rather than selling your losing investment first, you may prefer to “double up.” Doubling up is a strategy where you purchase the additional shares of the security you own before selling your original position.

The last day to double up (purchase the additional shares) typically falls during the last week in November and varies from year to year. If you double up later than that date, you won’t have enough time to sell your current position to establish the loss for this year without violating the wash sale rule.

Get the right advice

It’s important you understand how and why your investments can affect your taxes – this is only a brief summary. For more detailed information, contact your tax and investment professionals to discuss your particular financial situation and review your upcoming year’s tax projection. It’s important to evaluate your portfolio strategies and any investment changes that may lessen your tax bill.

Next steps

  • Determine if these timely ideas may help cut your next tax bill.
  • Mark important dates that affect your investment strategies on your calendar.
  • Ask your tax and investment advisors to review your portfolio and suggest ways to lessen your tax liability.

Wells Fargo Advisors designed this publication to provide accurate and authoritative information on the subject matter covered. Wells Fargo Advisors makes it available with the understanding that the firm does not render legal, accounting, or tax preparation services. For tax or legal advice, seek the services of competent tax or legal professionals.

Wells Fargo Advisors believes investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are critical in achieving a desired after-tax investment return. Wells Fargo Advisors has based the information provided on internal and external sources that the firm considers reliable; however, Wells Fargo Advisors does not guarantee the information’s accuracy.

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