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Year-End Planning to Help Lower Your Tax Bill

Published: September 19, 2020

Year-End Planning to Help Lower Your Tax Bill

Year-End Planning to Help You Lower Your Tax Bill

By planning ahead and taking advantage of these time-proven tax strategies before year-end, you may be able to lessen your tax bite come April.

As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there's no better time for tax planning than before year-end. That's because there are a number of tax-smart strategies you can implement now that could, potentially, reduce your tax bill come April. And with higher rates, being tax efficient is more important than ever.

Put Losses to Work

If you expect to realize either short- or long-term capital gains, the IRS allows you to offset these gains with realized capital losses. Short-term gains (gains on assets held less than a year) are taxed at ordinary rates, which range from 10% to 37%, and can be offset with short-term losses. Long-term gains (gains on assets held longer than a year) are taxed at a top rate of 20% and can be reduced by long-term capital losses.1 To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year's tax return and carry forward any unused losses for future years.

Given these rules, there are several actions you might consider:

  • Avoid short-term gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term losses to offset them, try holding the assets for at least one year.
  • Take a good look at your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. But most capital gains and losses will be triggered by the sale of the asset, which you usually control. Are there some winners that have enjoyed a run and are ripe for selling? Are there losers you would be better off liquidating? The important point is to cover as much of the gains with losses as you can, thereby minimizing your capital gains tax.
  • Consider taking losses before gains, since unused losses may be carried forward for use in future years, while gains are taxed in the year they are realized.

Unearned Income Tax

A 3.8% tax on "unearned" income for high-income taxpayers effectively increases the top rate on most long-term capital gains to 23.8%. The tax applies to "net investment income," which includes interest, dividends, royalties, annuities, rents, and other passive activity income, among other items. Importantly, net investment income does not include distributions from IRAs or qualified retirement plans, annuity payouts, or income from tax-exempt municipal bonds. In general, the tax applies to single taxpayers with a modified adjusted gross income (MAGI) of $200,000 or more and to those who are married and filing jointly with a MAGI of $250,000 or more.

What's to Come?

While there are currently no scheduled changes in federal tax rules, there are many steps you can take today to help lighten your tax burden. Work with a financial professional and tax advisor to see what you can do now to potentially reduce your tax bill in April.

Through our partnership with Fellows Financial Group all USSFCU members have access to investment management and financial planning services.

If you are interested in tax-efficent financial planning, please contact a Fellows advisor for more information at 703.779.9750 ext. 3 or simply schedule a time to discuss using the calender link below.

Schedule an Appointment

1 Under certain circumstances, the IRS permits you to offset long-term gains with net short-term capital losses. See IRS Publication 550, Investment Income and Expenses.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Wealthcare Advisory Partners a registered investment advisor. Wealthcare Advisory Partners and Fellows Financial Group, LLC are separate entities from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: CA, CO, DC, GA, FL, HI, IA, MD, MT, NC, OH, PA, VA, TX, WV. Personal and Commercial insurance services are offered through Fellows Insurance Group LLC. Fellows Insurance Group LLC is a separate entity from Fellows Financial Group LLC, LPL Financial and Wealthcare Advisory Partners. 

LPL Financial, Fellows Financial Group LLC, Fellows Insurance Group LLC and Wealthcare Advisory Partners do not offer tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Investments are not NCUA insured. No credit union guarantee. Investments may lose value. Fellows Financial Group LLC, LPL Financial and Wealthcare Advisory Partners are third party partnerships and are not affiliated with United States Senate Federal Credit Union and USSFCU Best Life.

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation. Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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