How To Reduce Taxes: End of Year Tips To Help Investors

Most individuals may be familiar with the common advice to pay property taxes before year end as well as to make charitable contributions. However, if someone is subject to the AMT tax, better known as the Alternative Minimum Tax, these deductions can and may be eliminated or reduced. Many people fall into the AMT category, where the IRS computes the individual’s taxes by the traditional method and then by the alternative AMT method, to determine the tax liability. The tax liability is the higher of the two.

Another common strategy used when determining how to reduce taxes is to defer income, such as a bonus, into the following year. Again, although there may be some benefit for certain taxpayers, there are other considerations. Will you be getting a promotion and a higher salary next year? Or, will you have less income perhaps because you are retiring, changing jobs, or have more deductions, such as medical bills or moving expenses?

While it is important to be informed about these strategies on how to reduce taxes, it should also be noted that your personal financial situation may not benefit from all of them.

Tips Most Investors Can Benefit From

How To Reduce Capital Gains Taxes

Mutual fund investors can avoid adding to their taxes if they are aware of when and if a mutual fund is declaring a capital gain for the year. If you are an investor in a retirement plan, you don’t have to worry about the capital gain. However, if you own a personal investment account timing your investment to avoid the capital gain is extremely important. You want to invest in a mutual fund after it has paid the gain otherwise you will have to report it on your income taxes.

How To Reduce Taxes By Purchasing Stocks Ex-Dividend

Many investors purchase a stock and aren’t aware of when a stock is going to pay a dividend. After a company declares that it will pay a dividend on a certain date, an ex-dividend date is also announced. Since dividends are treated as income to the investor, it is important to purchase a stock after the ex-dividend date so that the dividend will not have to be reported on that year’s income.

How To Reduce Taxes With Qualified Dividends

Some ordinary dividends paid by companies have special IRS treatment if the dividend meets certain criteria. One of the criteria is that there is a minimum holding period of the stock by the investor. If all of the criteria are met, the dividend is treated as a long term capital gain and is subject to the lower capital gain tax rather than the investor’s higher income tax rate.

Accelerating Retirement Contributions

Retirement plans, such as 401(k), 403(b), and Simple IRA’s require that contributions be payroll deducted. If you have not maximized your contributions or taken advantage of the catchup provision for those over 50, talk to your employer. Many employers will allow you to make an adjustment to your payroll before year’s end. If you are in a good financial position, you may be able to defer all or some of your final paychecks and reduce your taxable income. In addition to lowering your taxes, you are adding to your future retirement income needs. However, it is important that you reevaluate your contributions each year.

Wrapping It All Up

As an investor you have many tools to reduce income taxes while still meeting your investment goals. It is important that you know your options and how best to integrate them into your financial planning.

For personalized financial advice on what options are best for you, let’s talk.