Many Tax strategies require you to act before December 31st of the Tax year, not April 15th of next year. So, time is running out if you are thinking about Tax Planning.

Today, I will explain the 3 most important factors to consider – in order to implement end-of-the-year tax strategies.

1: Offset Capital Gains with capital losses from unwanted positions

If you have capital gains during the year, consider selling some of your unwanted positions where you may have losses.

For example,

let’s say you sold a position earlier this year – in your taxable account – and recognized a $10,000 profit.

If you do no more transactions this year, you owe capital gains on this profit.

Now, let’s say you are also holding a mutual fund that has been under-performing and you lost almost $15,000 in this fund thus far.

Let’s also say you don’t like the mutual fund anymore.

Here is your opportunity:

You could sell the unwanted mutual fund – before the end of the year – and offset the $15,000 loss against the $10,000 gains – and have a net loss of $5,000 for the year.

By doing this, you are NOT ONLY avoiding taxes on the $10,000 gain, but you could also use $3,000 of the $5,000 net loss to reduce your taxable income for the year. And carry forward the remaining $2,000 loss for the following years!

2: Estimate End-of-the-year capital gains accurately

You might be thinking

Oh well, I did not sell any of my positions during the year – So, I will not have any capital gains for the year.

This is not true If you are holding mutual funds in a taxable portfolio

In order to actively manage your money, mutual funds buy and sell underlying securities. In the process, if they make net profits, they are required to distribute the profits to you as capital gains and report the gains on form 1099-DIV to you by January 31st of the following year.

That means you do not know the actual capital gains tax burden of owning a mutual fund until after January 31st of the following year.

So, how do you or your tax advisor effectively plan a tax strategy – if you own a mutual fund in a taxable account?

Here is how.

Mutual funds generally estimate their per-share capital gains distributions at the end of the year. Based on their estimate and based on how many shares you have in the fund, you calculate your share of the capital gains.

And perhaps, work from there on your tax strategies – to reduce the tax burden.

3: Review if ROTH conversion is right for you.

Few factors to consider:

  • Is your current year income significantly less than prior years’ income?
  • Remember ROTH conversions are no longer reversible
  • Do you predict tax rates are low now and predict they might go up in the future?

After reviewing, if you believe conversion is right for you,

  • Figure out how much to convert, – this requires knowing how much taxes you owe on the conversion, and
  • Most importantly, complete the conversion before December 31st

Hope this information is useful. For more videos like this, please subscribe to my YouTube channel or follow me on Social Media. Thank you!

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