Plan Now to Pay Less: Four Year-End Tax Tips


Key Takeaway: When it comes to taxes, it can pay to be proactive. Don’t wait until April to try to reduce your bill. Seize the opportunity now with these four year-end tax tips.

I meet a lot of people who wait until April to take a look at their taxes. Though they finish their taxes on time (usually), they are often paying Uncle Sam more than they should.

That is why I emphasize tax planning rather than simply tax paying. With a little forethought, you could end up paying fewer taxes. Moreover, the best time to do your planning is not in April but before the year ends.

Here are four tips to help you elevate your status from mere tax payer to tax planner:

Choose a Tax-Friendly Giving Strategy

If you are charitably inclined, then try to give appreciated assets instead of cash. Not only will you help your favorite charity, but you can reduce your taxes too. By giving a stock or mutual fund that has done well over the past couple of years, you avoid paying the capital gains taxes that you would incur if you sold the security. And if you still like the investment, repurchase it with cash and increase your cost basis.

Donate to Charity from Your IRA

If you are 70 1/2, you can donate to charity using your IRA. We wrote about the permanent extension of this rule a while back, but succinctly: Instead of taking a retired minimum distribution (RMD) as taxable income, you can send the RMD to charity. When done correctly, the part of your RMD that you donated is not taxable and yet counts toward your RMD, reducing your taxable income.

Two important points: First, this rule does not apply to charitable gift funds or private foundations; your charity must be a 501(c)(3) organization. And second, you do not get a charitable deduction on your gift since you were never taxed on the income to begin with.

Review Your Portfolio

Take a look at your portfolio to determine if you had any losses that you can use to offset gains. In addition, review your mutual fund distributions to see if they will be considered short term (taxed more heavily) or long term (taxed less heavily). Then consider if it makes more sense to sell the mutual fund and pay taxes on your gains than paying taxes on the distributions.

While you are reviewing your mutual funds, look them up on Funds with higher turnover should go in tax-deferred accounts such as IRAs since these funds tend to make more taxable distributions each year. And if you are investing in fixed income (e.g., bonds or CDs), consider whether it makes more sense to use municipal bonds for more tax-free income. But be careful of this if you pay the alternative minimum tax (AMT).

Take a Look at Distributions

If you are over 59 1/2 and are retired, you should decide whether it is time to start taking money out of your IRA or 401(k), if you aren’t already. Ask your accountant to provide a tax projection to help you understand whether you can take money out of your accounts without moving you into a higher bracket. Sometimes, paying taxes now at a lower bracket makes more sense than waiting until 70 1/2 and taking RMDs that might push you into a higher bracket.

One final note: Taxes are tricky, and tax reform is coming. Thus I recommend that you have your accountant review any moves before you make them.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.