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5 Tax and Financial Moves to Make Before December 31

While tax season may seem a ways away, it’ll quickly be upon us. The end of the year is a great time to think about tax and other financial strategies that could save you money.

Here are five year-end planning moves to consider making between now and December 31.

1. Implement Income-Shifting Strategies

One way to reduce current income taxes is to defer taxable income into next year while accelerating deductible expenses into this year. Doing so will lower your current income, which could lower your tax bill in April.

To defer income, you could request that any year-end bonuses be paid in early January instead of late December. And if you’re self-employed, you could hold off on sending December invoices until early January if your cash flow permits.

To accelerate deductions, consider prepaying 2021 property taxes that will be due early next year. Making contributions to your IRA or 401k is another possible strategy. The IRS gives flexibility to contribute with a deadline of the date you file taxes (April 15, for most people). Keep in mind the traditional IRA contribution limit for 2021 is $6,000 (or $7,000 if you’re 50 years of age or over) while the 401k contribution limit for 2021 is $19,500 (if you’re 50 or older, you also are eligible for a $6,500 catch-up contribution). There are also limitations to deductibility based on your income.

Read More: 401k Contribution Limits Are Unchanged for 2021

If you’re planning to fund a child’s college education, contributions to a 529 in some states offer a deduction on your state income taxes. These contributions need to be deposited by year end.

Read More: How to Pay for Your Child’s College Education

2. Take Advantage of Tax-Loss Harvesting

There may be a silver lining to owning underperforming investment assets. With a strategy referred to as tax-loss harvesting, you can sell these investments before the end of the year to realize losses that can be used to offset up to $3,000 (when married filing jointly; $1,500 is the limit when filing single) in taxable investment gains and ordinary income. Unused investment losses above $3,000 may be carried forward to offset future capital gains or income, known as “Carry Forward Losses.”

If you implement this strategy, watch out for what’s referred to as the wash-sale rule. This prohibits you from buying back the security you sold — or any security that’s substantially equal to it — within 30 days.

Read More: Guide to Tax-Loss Harvesting

3. Make Tax-Deductible Charitable Contributions

At this time of the year, many people desire to help others who are less fortunate. By donating cash or assets to qualified charitable organizations — also known as 501(c)(3) organizations — you may also be able to reduce your taxes.

Assuming you itemize deductions on your federal income tax return, you can deduct qualifying charitable contributions in the year in which they are made. This includes contributions of cash, investment securities and personal property such as furniture, clothing and vehicles. You can generally deduct up to 50% of your adjusted gross income (AGI) as charitable contributions each year if giving cash, while the deduction is usually capped at 30% when gifting investments.

If you own appreciated securities, consider gifting them to a qualified charity. Neither you nor the charity will have to pay capital gains tax on the appreciated value. For example, suppose you own a stock that’s currently worth $20,000 and you paid $10,000 for it five years ago. If you donate the stock instead of selling it, you can deduct the full $20,000 value while avoiding paying taxes on $10,000 in capital gains.

If your income is substantially higher in 2017, then you may want to consider maximizing your charitable deductions for a couple years to come through charitable gift funds. This allows for deductions at a higher bracket.

Read More: Tax-Wise Charitable Giving: Donating Appreciated Assets

4. Rebalance Your Investment Portfolio

Against all odds, 2020 has finished strong in the stock market. One result of this could be that your target asset allocation has been knocked out of whack. For example, gains in your stock portfolio could push your percentage of equity holdings higher than your desired balance.

Therefore, consider meeting with your investment advisor to analyze the current status of your asset allocation. Based on this analysis, you may need to sell securities in some asset classes and buy securities in other asset classes to bring your allocation back to your target balance.

5. Spend Down Expiring Benefits

Taking advantage of tax-advantaged Flexible Savings Accounts (FSAs) can be a good move to use pre-tax dollars for specific known expenses. One challenge with these accounts is that the funds in them usually expire at the turn of the year. If you have unused funds, you should generally try to use it before losing it!

In some cases, employers give an elective to extend the benefits until March 15. Before blindly purchasing items, check with your HR team about the extension.

Our Take

The end of the year is approaching quickly, so make plans now to determine if strategies like these could be beneficial for you. Be sure to consult with a tax advisor for more details on the particulars of these and other year-end tax and financial planning strategies.

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Amin Dabit is the Vice President of Advisory Services at Personal Capital. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin leads Personal Capital's advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.
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Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.