As we start counting down the days to 2017, it’s time start thinking about your tax returns. April 15 will be here sooner than you think and here are five key actions to your portfolio that can yield meaningful savings when you file your taxes.
Increase retirement plan contributions
Maximizing your employer retirement plan contributions for this year ($18,000 or $24,000 for those over age 50) will help you sock away additional retirement savings while reducing your taxable income. Don’t worry if you’ve already hit your annual limit or if your employer does not offer a retirement plan, you can still contribute to your Individual Retirement Accounts. If you are under certain income limits, you may also be able to deduct contributions to a traditional IRA (up to $5,500 or $6,500 for those over age 50). These tax savings can add up: individuals in the 25% tax bracket who contribute $10,000 to their 401(k) realize income tax savings of $2,500!
Plan for charitable donations
Many of us think of charitable donations as giving away those jeans we’ve been hanging on to for a couple decades or cutting a check to our local church or college. Though these are admirable strategies, do not forget about your taxable brokerage accounts. You may own highly appreciated stock in which you’ll be able to donate directly to a charity or by transferring it to a donor advised fund, with the benefits of an income deduction, avoidance of capital gains tax if you otherwise sold the position and the ability to reduce exposure to a possible over-weighted position.
Sell securities at a loss
This may seem like a counterintuitive approach, but there may be some significant tax savings hidden in those investment mistakes. Unless you are in the 10% or 15% income tax bracket, the IRS requires you to pay taxes on positions sold for a gain. Investors are able to reduce or eliminate these taxes through tax loss harvesting, which involves selling positions in your portfolio for a loss, with the goal of netting out the gains already earned from positions previously sold at a gain throughout the year.
You must pay careful attention to wash sale rules, as you cannot sell a security for a loss and then buy it back right away. The IRS forces you to wait more than 30 days before or after (61 days total) the sale to purchase the same or significantly similar securities.
Sell securities at a gain
Instead of focusing on netting out capital gains and losses through tax loss harvesting, it may make sense to take additional profits on positions held long-term. If you are in the 10% or 15% income tax bracket, the long-term capital gains tax is 0%. You may want to take advantage of this tax benefit while the IRS allows it.
Beware of capital gains distributions from mutual funds
Mutual funds, which are baskets of securities actively managed by a portfolio manager, are required to distribute trading profits earned throughout the year by year end. Therefore, from October through December, owners of mutual funds may be at risk of receiving a significant taxable distribution, even if they didn’t own the fund for the whole year. It’s possible for someone to purchase a mutual fund, own it for only a couple days and still have to pay the capital gains tax. Don’t let this be you.
These tax-efficient investing strategies related to managing your investment portfolio are not intended to provide a comprehensive year-end tax plan, nor take the place of conversations with your tax planner. With each of the strategies, there are a number of potential drawbacks and penalties that could result if done improperly.
At New England Investment & Retirement Group, Inc. (NEIRG), we employ each of these strategies as we manage our proprietary investment model portfolios and provide customized financial planning strategies in coordination with our clients’ tax planners. If you’d like to discuss how NEIRG can help you with your financial plan, please don’t hesitate to schedule an appointment today!