A new year is approaching quickly. But before you begin celebrating the end of this year and the start of the next, make sure you're paying the lowest tax possible. Here are seven prime ideas that may help you trim your tax bill at the eleventh hour:
1. Harvest capital losses or gains. If it suits your investment needs, you could sell stocks to realize a capital loss and use that to offset prior gains. Or you might take a profit now to benefit from losses earlier in the year. In terms of meeting year-end deadlines, it's usually the trading date of a transaction that matters for tax purposes.
2. Watch out for wash sales. If you sell stocks or mutual funds at a loss and reacquire substantially identical holdings within 30 days, the wash sale rule normally prohibits you from deducting any loss on the sale. Usually, it's easiest to wait until that much time has passed to buy back the securities. Or you can acquire an additional lot first and wait 31 days to sell the original shares.
3. Put a late charge into charity. If you make a monetary donation to a qualified charitable organization this year, you should be able to deduct the full amount on this year's tax return. A donation you make using a credit card as late as December 31 is deductible this year, even if you pay the credit card bill next year.
4. Meet your RMD obligations. The tax law generally requires anyone over age 70½ to take payouts from employer-sponsored retirement plans and IRAs. Required minimum distributions (RMDs) for the current year are based on the accounts' value on December 31 of the previous year—and the penalty for not taking the money is equal to 50% of the amount you should have withdrawn.
5. Boost your 401(k) savings. By allocating a bigger portion of your year's final paycheck to your 401(k) account, you can reduce your current tax bill still further. Best of all, the extra savings will grow and compound tax-deferred until you take withdrawals.
6. Pay next semester's tuition bill. Parents whose income doesn't exceed phaseout amounts may qualify for one of two higher education credits. You can pay the tuition for your child's upcoming semester and count the payment toward this year's credit.
7. Reward your college grad. Generally, you still can claim a child who graduated from college this year as a dependent on your tax return if you provided more than half of his or her financial support. If you're just shy of that mark, a generous holiday gift used for support could lock in that exemption for the year.
Keep in mind that these are only brief explanations of ways you might lower your tax bill very late in the year. Other factors and special tax rules may affect your decisions. Consider all the implications before you make your moves.