Your 2017 tax return isn’t due until April of 2018, but now is the time to consider your options for tax planning. Many of the tax-savings moves you can make for your 2017 return need to occur before the end of the year. Here are answers to questions you may have about tax planning strategies in the weeks ahead
Are there investment moves I should consider making before the end of the year?
It is important to know what your tax considerations are before making any moves. For example, many investors worry about capital gains. One effective tax-saving strategy is to offset any capital gains you might realize in your portfolio with capital losses. If you have investment holdings that are worth less than what you paid for them, you could consider selling those positions and realizing a capital loss, particularly as a way to offset capital gains. This strategy may be appropriate for taxpayers who may have capital gains that are subject to taxation.
How about the tax implications of investments I own or am considering?
In general, there are many tax implications when it comes to investments. Let’s take a deeper look into mutual funds. There are different tax considerations with mutual funds because you are subject to distributions made by the fund that are taxable. It is possible that fund positions you own may pay out a significant distribution before the end of the year, even though the fund itself may have a negative return for the year. Check to see the status of potential distributions of any fund you own. Keep in mind that this tax treatment doesn’t apply to funds held in tax-deferred vehicles like a 401(k) or IRA.
Are there steps I can take to reduce taxes on my income?
If you can manage your income, you may want to pay attention to whether your income level is closing in on a threshold point that moves you into a higher tax bracket. For example, a married couple filing a joint return in 2015 with taxable income above $74,900 (after deductions and personal exemptions) would be in the 25 percent tax bracket. That doesn’t mean all income is subject to a 25 percent tax rate, as income is taxed in steps (everything under $74,900 would be taxed at a 15 percent rate or less). But by reaching the 25 percent tax bracket, any net long-term capital gains realized would be subject to a 15 percent tax at the federal level.
By keeping income (including any gains) below $74,900, a married couple remains in the 15 percent tax bracket, qualifying them for a zero percent long-term capital gains tax rate. Finding ways to keep income under thresholds can be important for different reasons for people with varying income levels.
When should I make charitable donations?
Your favorite charities would likely prefer any gifts to be made as soon as possible. To claim deductions on your 2015 tax return, donations must be made by December 31, 2015. Keep in mind that to claim a charitable deduction, you need to itemize deductions and have a written record, either a bank statement or a receipt from the charity.
Keep in mind that if you are in the 10 percent or 15 percent tax bracket, you qualify for a zero percent federal tax rate on long-term capital gains and qualified dividends, significant tax refunds. In this case, “harvesting” capital losses is not a beneficial strategy.