Whether you are new to investing, or have been an active investor for a while, your tax planning strategy should always be in the forefront of your mind. With the end of the year just around the corner, now is the time to take a look at your finances and evaluate whether or not you should be making one or more smart tax planning moves before the year-end deadline. These tips will be especially beneficial for business owners or individuals who earn a significant amount of investment income in order to offset a high tax bill in the Spring of 2020.
1. Tax-loss Harvesting : A key end-of-year tax planning strategy utilized by investors of all income levels is known as tax-loss harvesting. This involves selling assets that have shown a loss in order to offset both taxable ordinary income and any reported capital gains realized throughout the year on other investments. Mutual funds, for example, are fairly consistent with capital gains distributions, so mutual fund holders may benefit from looking for other losses to sell prior to the year-end to reduce their overall liability.
However, there are caveats to this strategy. Since the IRS will not allow investors to buy an asset just to sell it for purpose of owing less taxes, investors need to be wary of the “wash-sale” rule. The “wash-sale” rule indicates that an investor will not be able to claim capital loss if they re-purchase the same asset or nearly identical asset again within thirty days of their loss-showing sale. This being the case, you may want to purchase a similar asset rather than being out of the market for thirty days altogether.