Before you shut down for the holidays, remember that just a few hours spent reviewing your financial life may help you minimize taxes for 2015. Here are a few ideas to consider before you ring in the new year.
Sell your losers. If you have investment losses in a taxable account, now is the time to use those losers to your advantage. You can sell losing positions to offset any gains that you took previously in the year, to minimize your tax hit. And if you end up with more losses than gains, note that you can deduct up to $3,000 of losses against ordinary income. (If you have more than $3,000 of losses, you can carry over that amount to future years.)
Avoid wash sales. Once you start to clean up your non-retirement accounts to book losses, however, avoid getting soaked by the “wash sale” rule. A wash sale is the purchase of a “substantially identical” investment within 30 days; if you make such a stock purchase, the IRS won’t let you deduct the loss. To stay out of trouble while keeping your investment plan on track, wait 31 days before repurchasing any stock or fund you sold, or replace the security with something that is similar, but not the same — and hopefully something cheaper.
Give winners away. You may already be planning to make a few year-end charitable gifts. Another smart way to lower your tax bill come April is to donate appreciated securities — like stocks, bonds, or mutual funds — instead of cash. You get the deduction for the current market value (not just what you paid for them), as you would with cash, but you also escape taxes on the accumulated gains. Since charities don’t have to pay capital gains on the gift, they get the full value of your generosity.
Get serious about deadlines. If you’re the type of person who waits until the last minute for everything, take note: To qualify for write-offs, all charitable contributions (and business expenses, for that matter) must be postmarked by midnight on Dec. 31. The IRS says just writing “December 31” on a check does not automatically qualify you for a deduction; and pledges aren’t deductible until paid. Donations made with a credit card are deductible as of the date the account is charged, so if you’re going down to the wire, make your gifts by credit card.
Preview your 2016 income. If you’re self-employed, estimate your income for 2016. If it looks like your tax bracket could rise next year, make sure you’ve sent out invoices now for all fourth-quarter work, so you’ll receive the income in this tax year. You should also delay making tax-deductible business purchases until January, when the write-offs will become more valuable. If you think you’ll bring in less money in 2016, do exactly the reverse.