These three things are time sensitive, not all of them will apply to every reader, but if you are in these situations I highly recommend you make decisions on these very soon, so you could hope to action them before the end of the year. I believe you will have a much greater sense of satisfaction knowing that when balls drop around the world on December 31st you will have taken steps to clean up your finances and take advantage of these tax strategies.
People who have Investments in a non Tax Advantaged Account – Sell your Losers
You can reduce your tax bill in two ways by selling off losing stocks, this is called Capital Loss Harvesting. Be careful not to buy back the same, or substantially similar stock again within 30 days (61 roundtrip) or you will incur a Wash Sale which will nullify your ability to harvest the loss.
For more reading on Capital Gain Harvesting and Wash Sales see these two posts, the concept works well for Index investors too.
Capital Loss Harvesting and the Perils of a Wash Sale
Capital Loss Harvesting for the Index Investor
The greatest value you will receive from selling your losers will be to first offset any short term capital gains, since these are taxed at your income level tax rate. After this there is a surplus of $3,000 in loss that can be deducted from Ordinary Income each year, you really, really need to find a way to ensure that if you have any losing stock you realize the loss now, and use it to reduce your income, as that can often save you thousands in Taxes every year.
Convert a Traditional IRA to a Roth IRA
This is a great planning tool, but will increase your present years taxable income since the process will effectively consider the amount of the conversion to be added onto your salary/income for the year and push your current tax liability higher, however once in a Roth it is in much better shape. You can use the Capital Loss Harvest to reduce 2013 taxes, and the Roth Conversion to increase them again, but in the process you clean out your liabilities and create much healthier assets.
Further Reading:
Raise your Tax Bill this year, examining deferred tax strategies to save money
Partial Transfers in converting to a ROTH
My experience opening a Vanguard Roth IRA
Sell Your Home if it is Underwater
If you are in the unfortunate position to have a mortgage greater than the value of your home it is called ‘being underwater’ it is a horrible place to be financially and emotionally. There is currently a favorable Tax climate for such people in that the mortgage forgiveness is currently not taxable, however, this looks like it may change in the near future as it is constantly battled over in Congress.
If the tax status on this changes then the IRS will consider the mortgage forgiveness as Income and expect a tax bill.
Example:
- Mortgage Value $150,000
- Present Home Value $100,000
If the bank approves the sale of the home and allows you to exit the closing without owing any money currently that will not have any impact on your Tax burden, but if that changes (and it is quite possible it will) then you would have to add $50,000 onto your Tax bill and be forced to pay taxes on that as though it was income at your present tax level.
Further Reading:
IRS Website: Mortgage Debt Relief Act
It takes time to get the bank to agree to accepting the short sale, and finding buyers for closing, so if you are not in the process yet it might already be a little late, but if you have decided that selling is the best solution for your financial needs then act quickly and decisively to increase your chances of getting the process concluded whilst still in your favor.
Please consider the advice here as food for thought rather than Professional Financial Advice and speak to an expert before making any decisions based on this.
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