Blog

5 Year-End Portfolio Moves to Lower Your Taxes for 2013

Between preparing for family gatherings and gift shopping for the holidays, if you can find the time to sit down and review your portfolio, you may be able to make changes that have a significant impact on your taxes for 2013 and beyond. Below are five areas that you should consider depending on your long-term goals and tax situation.

Maximize 401(k) / 403(b) contributions. If you have not maxed out your retirement plan contributions for 2013, you may be able to increase your contribution percentage for the last couple of pay periods of the year. If you are receiving a year-end bonus or have extra cash in the bank, you can tell your HR department to deduct a larger amount of your paychecks to maximize your 2013 contribution ($17,500 if you’re under age 50, $23,000 if you’re age 50 and older). Not only will this lower your taxable income for the year, but you are saving more for your retirement and taking advantage of tax deferred growth in the account.

Keep an eye out for year-end capital gains distributions. Stocks have had a great run in the past few years, which means mutual funds may be selling positions that have gains, thereby causing significant year-end capital gains distributions to their shareholders. If you are planning to rebalance your portfolio or make investment changes before year-end, make sure you pay attention to the mutual funds’ distribution estimates (you can usually find this information on the mutual fund company’s website). For example, if you are planning to buy Fund A, and it is planning to make a significant distribution this year, then it may make sense to buy it after the Record Date so you don’t end up with the distribution as taxable income in 2013.

Look for potential tax-loss sale candidates. If you have realized capital gains in 2013, or if the mutual funds in your portfolio are making sizeable distributions, you can look for securities in your taxable accounts that have losses. By realizing the losses in your portfolio, those losses can be used to offset the realized gains to ultimately reduce your net capital gains, and therefore, your taxable income. If the security you sold for a loss is one that you would like to hold for the long-term, you can always buy it back after 30 days (otherwise you violate the wash sale rule and you won’t be able to use the loss).

Consider making gifts of appreciated securities. Whether it’s a gift to charity or a family member, giving appreciated securities is a great way to lower your taxes while achieving a personal goal. If you write a check for $5,000 to a charity, you get a tax deduction for the amount of the check. However, if you give $5,000 worth of stock with a cost basis of $2,000, you not only get a tax deduction for $5,000 on your tax return (if you itemize deductions), you also avoid the tax on $3,000 of capital gain if you were to sell the stock. Similarly, if you have an adult family member who is in a low tax bracket (see the next bullet point), you can gift the appreciated security to him or her, and have them sell it without paying any taxes.  

Create capital gains if you're in a low tax bracket. While this strategy does not have a direct impact on your 2013 taxes, your actions now can provide you with tax benefits in future years. Whether you are temporarily or permanently in the two lowest tax brackets, take advantage of the zero capital gains tax. If you have investments with unrealized gains in your portfolio, you can create just enough gains and still remain below the 25% tax bracket, and all capital gains created will not be taxable. After realizing the gain, you can always buy the security back. This strategy is particularly useful for those who are temporarily in a low tax bracket because you are in a sense resetting the cost basis at a higher level without paying any taxes. In the future, when you are in a higher tax bracket and you decide to sell the security, you will pay less in taxes than if you had not reset the cost basis.

Not every one of the above five areas may be applicable to your tax situation in 2013, but it’s important to review these items at the end of each year since your tax situation may change from year to year and tax laws also change every few years.