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Ask a Fool: What Are the Smartest Year-End Tax Moves for Investors?

By Matthew Frankel, CFP® - Dec 22, 2017 at 12:00PM

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Investors can use these three smart moves to lower their taxes.

Q: What are some things investors can do before the end of the year to lower their taxes?

Perhaps the most obvious investment-related tax move you can make is to contribute more to your 401(k). For traditional and Roth IRAs, you have until the April 2018 tax deadline to get your contributions in. However, for 401(k)s and other employer-sponsored retirement plans, your payroll deferrals generally need to be made before the end of the year. So, if you're still expecting a paycheck in 2018, it can be a smart idea to talk to your payroll department.

Next, if you have any losing investments and decide to sell them and move on, you can use your loss to reduce your capital gains tax liability. Even if you don't owe any capital gains taxes, you can use losses to offset up to $3,000 of your earned income. This is known as tax-loss harvesting.

Finally, since the stock market is up more than 20% in 2017, many people are sitting on some major gains in their portfolios. One smart tax strategy is to donate some of your appreciated stocks (or mutual funds) to charity instead of cash.

Doing this has a couple of big benefits. For one thing, you'll avoid paying capital gains tax on the stock. Plus, you still get to deduct the entire market value of your donation. For example, if you bought a stock for $1,000 and it's now worth $5,000, you can donate it to charity and enjoy a $5,000 charitable deduction on your taxes.

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