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By Al Chingren
December’s almost over, but you still have time to make smart year-end tax decisions. While your tax bill alone shouldn’t drive year-end investment transactions, you can use the remaining time this month to get your tax affairs in order before next year’s filing and get ahead of some Dec. 31 deadlines.
Here are five ideas that might help reduce your tax bill or boost your refund next year.
When you take money out of taxable investments, you'll end up with a capital gain or loss, depending on whether you made or lost money on the sale. If you made money, you’ll owe additional taxes on the amount over your cost basis.
But you might be able to lower your tax bill if you use losses on another investment to offset your gains,1 a strategy known as “tax-loss harvesting.” Talk to your tax advisor to see if this might be an option for you.
Investing in Traditional or Roth IRAs provides tax advantages. While you can make IRA contributions up until next year’s Tax Day, investing now means more time for your money to grow. And if you're eligible, you may also be able to use Traditional IRA contributions as a tax deduction.
If you're over age 70½, you’ll need a plan to take required minimum distributions (RMDs) from retirement accounts by year-end. Any remaining RMD amount not taken by Dec. 31 could be subject to a 50% percent penalty.
Additionally, make sure you keep track of the tax amount being withheld with each redemption to avoid underpayment.
You can also use RMDs for qualified charitable distributions. Instead of taking all or part of your RMD, you can send IRA funds directly to a charity or non-profit of your choice. The RMD will not be taxable, and you won’t get a charitable deduction. However, this strategy does reduce your taxable income and adjusted gross income. Consult a tax advisor for details.
Unlike IRAs, 529 education savings plans require that contributions be made by year-end to qualify for the state deduction , if applicable. Anyone who contributes to your student’s account—related or not—may be able to take a deduction, depending on their state's tax laws.
Making smart decisions now can help you save on taxes before time runs out. And, the more you save, the more you can invest toward your investment goals.
Want more tax-planning tips? Here’s a longer list of tax strategies that can help take the sting out of your tax bill.
1 Long- and short-term capital gains are taxed at different rates. Long-term gains may only be offset by longer-term losses. Likewise, short-term gains may only be offset by short-term losses.
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Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
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