There are only a few trading days left in 2013 and though, ideally, tax planning on your investments should be a year round event, you still have some time to improve your 2103 tax situation. Here are three quick tips that may help you this December.
1. Increase your 401(k) allocation
Perhaps the single best thing you can do for tax efficiency, if you can afford it, is to increase the money that you put into your 401(k) plan. 401(k) contributions are tax deferred until retirement, so they reduce your current tax bill by reducing the share of your income that’s taxable. For 2013 you can contribute up to $17,500 into your 401(k) if you’re under 50. Often, your employer will match these contributions which multiples the benefit. Plus, if you’re 50 or older you can use catch up contributions to add up to another $5,500 to your 401(k) but, remember if you have the opportunity, starting to save when you’re young is much easier than catching up later.
2. Tax loss harvest to cut your tax bill
The deposition effect means that you are more likely to sell stocks that have risen in value than sell the losers. However, for your taxable accounts, selling losers can really help from a tax perspective. Investment losses can be used to offset taxes you owe on stocks you’ve sold this year with a gain. This can even save you money outright on your taxes by allowing you to use the impact from $3,000 of investment losses to reduce your tax bill if you haven’t realized any gains. Plus if you have more than $3,000 in losses, the remainder can be deferred to future tax years. With tax loss harvesting, ideally you want to first sell stocks that you’ve held for less than a year on which have lost money. Also note that you can’t buy the same stock or any investment that is “substantially identical” back within 30 days of selling it per IRS rules, otherwise the loss won’t count from an IRS standpoint. Finally, be careful of putting the cart before the horse, tax loss harvesting should be an opportunistic way to tweak your portfolio trades to make them more tax efficient rather than forcing you to make major changes in portfolio allocation solely for the tax implications.
3.If you’re giving to a charity, give stock with a capital gain
If you are giving to charity, consider giving them stock with a capital gain. You don’t pay the tax on the gain and neither does the receiving charity. If you would have otherwise given cash, then it’s a tax efficient way to give. In addition, these donations to charity are tax deductible just as cash would be.