As we move into the last two months of the year, it's important to start to plan for year-end financial activities. Because not much has changed this year when it comes to tax laws, strategies that you may have used last year will most likely still be applicable. Here are a few to get you started:
1. Harvest gains/losses
Because financial markets have not been particularly strong this year -- the S&P 500 index is only up 1.5% through Oct. 29, 2015 -- there could be opportunities to do tax-loss harvesting. What this involves is selling off assets to take a tax loss. Just be careful not to get snagged by the Wash-Sale Rule. This becomes an issue if you repurchase the harvested asset, or one that is substantially identical, or an option to buy a substantially identical asset within 30 days after the original sale. Alternatively, if you have capital losses elsewhere or a carryover from previous years, it might be good to match those up with some gains to create some tax-free capital gains.
2. Be cognizant of mutual fund capital gains distributions
If you own mutual funds outside of a retirement or any other type of tax-deferred account, it's a good idea to check with your mutual fund company to see if it plans to make capital gains distributions before 2015 is over. If your fund has traded throughout the year and has trading profits, it is required by law to distribute 90% of these profits to its shareholders (see: regulated investment companies). This can be bad if your share price has dropped or not really appreciated for the year since you will be paying taxes on gains but really having losses. An alternative, in this case, is to sell your shares prior to the ex-date of the distribution. If you have a lot of funds, you can go to Capital Gains Valet for full lists of mutual fund distribution information across various fund families.
3. Use your FSA funds and maximize your medical insurance
Flexible spending accounts (FSAs), the payroll-deduction-funded vehicle that allows one to pay for numerous items with pre-tax dollars, is often a use it or lose it proposition. Be sure to check to see when the cut-off date for your FSA is; some are year-end and others give a bit of leeway into the next year. In any event, the last thing that you want to do is leave any funds in there that you don't have to because they will be lost.
If you have met your medical deductible for the year, it might be wise to try to fit in any doctor visits or procedures in the current year. This can be trying because many will be attempting to get in under the wire, but if you plan ahead you might be able to make it work.
4. Max your contribution to your retirement plan(s)
The list of retirement plan options is lengthy. If you have a plan available through your employer, be sure to consider maxing out your allowable contributions. For example, the maximum contributions for a 401k for 2015-2016 is $18,000, with as much as $6,000 in catch-up provisions allowed for those over 50.
5. Review your potential tax credits
Tax credits are a beautiful thing -- even more beautiful than tax deductions. A tax credit is a dollar-for-dollar tax deduction from your actual taxes due. According to Investopedia.com, there are over 20 different types of tax credits (see: tax credits), but some of the most common ones are educational tax credits for you or your dependent child, residential energy tax credits, child care tax credits, and tax credits for the elderly and disabled.
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