As summer comes to a close and we begin thinking about the holidays, the end of the year can seem like it is still a long way off. But with only a few months remaining, now is an ideal time to take a closer look at your tax situation.
The good news is that there is still time to take meaningful steps that may improve your tax situation for the current year. Waiting until tax season can mean missing opportunities that need to be addressed before December 31.
Here are several areas worth reviewing now.
Review Your Tax Situation
Take a look at your year-to-date income, tax withholding, investment activity, and other major financial changes. A tax projection can help determine whether you are on track or may face an unexpected tax bill.
If you expect to owe more than anticipated, there may still be time to adjust withholding or estimated tax payments.
Review Retirement Contributions
Year-end is a good time to review contributions to your 401(k), 403(b), IRA, or other retirement accounts. If you haven’t reached your savings goal for the year, determine whether you can increase contributions before year-end.
Be sure to consider any available employer matching contributions as well.
Consider Roth Conversions
For some investors, converting money from a traditional IRA to a Roth IRA may make sense. A Roth conversion generally creates taxable income in the year of the conversion, so it is important to consider your current tax bracket and how your tax situation may change in the future.
A conversion may be particularly worth considering during a year when your income is temporarily lower than normal.
Review Investment Gains and Losses
If you have investments in a taxable account, review your realized and unrealized gains and losses.
Tax-loss harvesting may allow you to use investment losses to offset capital gains and, in certain circumstances, other taxable income. At the same time, if you are considering selling an investment with a significant gain, understanding the potential tax consequences beforehand can help you make a more informed decision.
Make Charitable Gifts Strategically
If charitable giving is part of your financial plan, consider whether there are tax-efficient ways to make your year-end gifts. Depending on your circumstances, donating appreciated securities or making a qualified charitable distribution from an IRA may provide tax benefits.
Don’t Forget About RMDs
If you are required to take a required minimum distribution from a retirement account, make sure it is completed by the applicable deadline. Missing an RMD deadline can result in significant tax consequences.
Look Ahead
Effective tax planning isn’t just about reducing this year’s tax bill. It is also about understanding how today’s decisions affect future years.
Consider whether your income, retirement plans, investment activity, charitable giving, or other circumstances are likely to change next year. In some situations, paying additional tax today may create a more favorable long-term outcome.
Don’t Wait Until Tax Season
By the time you meet with your tax preparer in March or April, many year-end planning opportunities may have already passed.
September, October, November, and December are valuable months for proactive tax planning. There is still time to review your situation, identify potential opportunities, and take action before the year ends.
The goal isn’t simply to pay less tax this year. It’s to make thoughtful decisions that support your broader financial goals while taking advantage of opportunities that are still available.
Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Tax-loss harvesting is a strategy of selling securities at a loss to offset a capital gains tax liability. It is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains, though it is also used for long-term capital gains.