9 Tax Tasks to Do Before Year-End

NOV 01 | 2018
Close-up a dollar bill.

Tax Day may be five months away, but taking care of a few things before the end of the year can put things in order before you file. Why now? In some cases, you'll need to act by Dec. 31 to meet year-end deadlines.

You should also have a good idea of how much income you'll have to estimate your marginal tax bracket. That can help you know if it makes sense to act now or to wait until next year.

Tax Decisions to Make Now

To help you prepare, here's an outline of year-end tax considerations. These tax reminders might help reduce what you owe or increase your refund.

1. Review Potential Gains and Losses

When it's time to take money out of your taxable investments, you'll have either a capital gain or loss, depending on whether you made or lost money with your sale. Selling with a gain means you'll owe additional taxes on the amount over your cost basis. You might be able to offset gains by selling other investments at a loss. If it makes sense to sell securities that have lost value, consider that option as a way to lower your tax bill.

2. Note the Trade Date for Portfolio Rebalancing

If you plan to rebalance your portfolio, transactions in a taxable account will trigger a gain or loss for each account. Keep in mind that the trade date of your transactions determines the year in which potential taxes will be due. Also, be aware of year-end distribution dates. Purchasing new shares on or before the dividend date means you also receive the fund's income and capital gain payments, if any.

3. Determine When to Take a Roth Conversion

If you're considering converting part or all your Traditional IRA to a Roth IRA, you'll owe taxes on any contributions and earnings not previously taxed. You'll need to decide if you want to pay taxes on the conversion this year or postpone that until next year. To spread the taxes over multiple years, you might want to do a partial conversion.

4. Contribute to Your Retirement Accounts

Whether you contribute in a Traditional or Roth IRA, you benefit from tax-advantaged investing. While IRAs allow you to make contributions until Tax Day, making contributions earlier means more time in the market for your dollars to grow. Take note: If you're eligible, you might be able to take a deduction for contributions to a Traditional IRA.

5. Review Tax Withholding for RMDs

If you're over age 70½ and taking required minimum distributions (RMDs), take note of the tax amount being withheld with each redemption. Adequate withholding can be especially important for avoiding underpayment if you're making quarterly tax payments. Don't forget, any RMDs not taken by December 31 could be subject to a 50 percent penalty.

6. Make 529 Plan Contributions

Unlike IRA contributions, purchases into 529 Education Savings Plans must be made by year end to take advantage of a state deduction, if applicable. Anyone—related or not—may be able to take a deduction for contributions to your student's account, depending on their state's tax laws.

7. Review Education Expenses

If you have a student in college, you might be able to take deductions for education-related costs. Review your anticipated income to determine if when you want to spend the money now to take advantage of those deductions this year or wait until next year. You may also be eligible for educational credits, such as the American Opportunity Tax Credit and the Lifetime Learning Credit.

8. Consider Charitable Donations

Donating your taxable investments presents a win-win situation for the qualified organization of your choice and you. When you donate securities in-kind, you don't pay taxes on the appreciation and you may also receive a deduction. Refer to the IRS website or talk to your tax advisor for details.

9. Keep Gifting Limits in Mind

If you're planning to reduce your estate by making gifts to family, take note of the annual exemption. As of 2018, the IRS allows you to give up to $15,000 per person per year without incurring gift taxes. You can still give more than the limit per year to an individual and not incur gift tax, but you must report it and count it towards your lifetime exemption amount ($11.2 million in 2018).

Put Tax Savings Toward Your Investment Goals

Looking ahead has its benefits. Early tax planning lets you make money-saving decisions before time runs out. And, the more money you save from taxes, the more you have to invest toward your investment goals.

Find more tax-planning help in our Tax Center.

Find More Tax-Planning Help

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.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.