Being a tax-savvy investor means thinking about taxes not only in April, but throughout the year. Let’s take a look at 6 things you can do this fall before the end of 2015 to help your tax situation:
1. Assess your 401(k) contributions (or 403(b) / 457(b) / TSP):
- Are you on track to max out your contributions? The limit in 2015 and 2016 is $18,000 (or $24,000 for those 50 and over). If you need to, consider increasing your contribution % for the remaining pay periods to help reach the max. You can check with HR, but most systems automatically shut-off contributions once you reach the $18,000 limit in their plan.
- Employer match - Does your employer offer a match? If so, be sure to take full advantage of it. That’s a 100% guaranteed return on your deposit! (That’s something you won’t find anywhere else.) Be mindful of how the match is set up (quarterly, capped at x%, etc.) and check if there is a vesting requirement.
2. Harvest Losses
Short term losses are inevitable during your investing career. Remember, while on average equities return 7% annually, that does not come at a steady 7% per year. (Siegel, Stocks for the Long Run). When losses do occur, it can be a great time to assess your portfolio and consider tax-loss-harvesting. (In short, TLH is the process of selling investments that have declined in value and replacing them with a similar asset to maintain the appropriate risk profile in your portfolio.) Manual tax-loss-harvesting can be very tricky, you’ll not only have to consider the wash-sale rule, but also factor in short-term redemption fees, short-term gains, trading costs, and fund composition differences and how they affect your overall allocation. On the other hand, robo-advisors such as FutureAdvisor employ technology and sophisticated algorithms that automate tax-loss-harvesting. Our systems check for TLH opportunities daily for our Premium clients, while dynamically weighing all the trade-offs. Over the past year, the average FutureAdvisor Premium client had a tax savings of $2,258 as a result of tax-loss-harvesting!  Read more about TLH here.
3. Asset Placement
It’s not just about holding the correct investments, it’s about where you hold them. For example, REITs are a very important component of your portfolio, but they typically disburse 90% of their income as dividends, which are taxed at your ordinary income rate.  This rate can be nearly 40%, even without state taxes factored in! That’s why it's smart to hold REITs in a tax-sheltered account, such as an IRA or 401(k), as opposed to a taxable account. This is called “tax-efficient asset placement,” and over the life of your investment can result in substantial savings. FutureAdvisor Premium clients get tax-efficient asset placement as part of our Premium Service, at no additional cost. Read more about tax-efficient asset placement here.
4. Donate appreciated stock
Making a charitable contribution? Instead of giving cash, consider gifting one of your most appreciated stocks. Most non-profits gladly accept in-kind stock donations. You not only get a tax write off for the donation, but you’ll also avoid paying the capital gains. Non-profit organizations can sell the stock without paying any capital gains, so it’s a win-win! Contact the charity and ask for in-kind donation instructions, most have them on their website. Then write a letter to your brokerage firm telling them how many shares you want distributed to the charity and include tax-lot information if applicable. Just don’t wait until mid-December, usually these take a few weeks to process. Also of note, donating your shares with the highest capital gains can help alleviate estate tax liabilities for your heirs.
5. Estimate Your Refund
Use tax forecasting software to get an estimate of your 2015 tax refund, or liability. It may give you insight into areas to focus to reduce your tax burden for the year.
6. Fund your (Roth) IRA!
By now you should have a pretty good idea of what your 2015 income will be, so you should be able to tell if you qualify for making a Roth IRA contribution. No need to wait until April to make your 2015 contribution. In fact, the earlier you make your contribution, the more time it has to work for you! Earn too much to contribute directly to a Roth IRA? Consider a “Backdoor Roth IRA,” provided you don’t have existing Traditional or Rollover IRA’s. And remember, if you and your spouse are not covered by a retirement plan at work, you may qualify for a deductible Traditional IRA contribution to lower your taxable income for the year. In addition, if your spouse is covered by a retirement plan at work and you are not, you may qualify for a Traditional IRA contribution and may take a partial deduction to lower your taxable income for the year. Whether it’s a Roth or Traditional contribution, maxing out your IRA is a great idea.
With careful tax planning throughout the year, you may be able to reduce the amount of taxes you owe Uncle Sam. And remember, if you have a complicated tax situation, hiring a tax attorney or tax consultant can certainly be worth your time and money.
Want to talk about your portfolio and how FutureAdvisor’s Premium service can make you a more tax-efficient investor? Contact one of our licensed financial advisors today!
 $2,258 represents the average tax savings for Premium clients who had taxable accounts managed by FutureAdvisor from 10/1/2014 - 10/1/2015, with at least $10,000 in assets. http://www.sec.gov/answers/reits.htm
Disclaimer: The information contained herein is for informational purposes only. FutureAdvisor does not provide legal or tax advice. The information expressed is educational in nature, is not individualized, and should not be considered legal or tax advice, a forecast or guarantee Approv of future results, investment recommendations, or an offer to buy or sell securities by FutureAdvisor. The tax efficiency strategies discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained. Tax laws and regulations are complex and subject to change, and the contents herein may not be updated on a real-time basis to reflect changes to the tax laws. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information contained herein. Clients should consult with their personal tax advisors regarding their specific situations and the tax consequences of investing in particular types of investments or through different types of accounts. FutureAdvisor makes no warranties with regard to the information herein or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.