Four Tax Moves to Make Before 2016

Clearly there’s a lot to be gained from making great investments.

But, what most people don’t realize is that keeping your profits can be even more important when it comes to building Total Wealth.

[ad#Google Adsense 336×280-IA]That’s why, as we head into the last few days of 2015, I want to talk about the smartest four moves you can make right now… to set yourself up for a really terrific 2016.

They’re not your usual advice though.

You can simply pick up your favorite mainstream mag for that.

No… these four moves will not only change how you think about money but, in doing so, dramatically improve your profit potential, too.

Here are four tax moves to make before 2016 arrives.

Year-End Tax Move No. 1: Time Your Investments, NOT the Markets

Most investors hate the idea of losses, myself included. They’re a constant reminder that something didn’t go as planned during the investment process.

Yet, they’re also a good thing – or at least they can be in small amounts.

That’s because the IRS lets you use capital losses as a means of offsetting realized capital gains. So if you’ve got a number of big winners that have done well, selling a stinker or two in the next few days may be just what you need to cash in without triggering a monster tax bill this year.

Ideally, you want to match long-term gains against long-term losses and short-term gains against short-term losses. That way you can deduct net losses against gains.

If you run out of gains, Uncle Sam allows you to use as much as $3,000 a year to offset other types of income such as your salary or even IRA distributions. Further, you can carry losses forward to future years until you’ve exhausted the “supply.”

Year-End Tax Move No. 2: Hold the Right Investments in the Right Accounts

You’d think our government would make it easy to sock your money away for decades, given how much jawboning our leaders do about saving for retirement. Unfortunately, the reality is that they make it very tough… and very confusing.

That’s because every type of investment account is subject to different tax treatment.

I’m bringing this up today for the simple reason that studies show that having your investments in the right accounts can increase your after-tax wealth by 15%-20% over your investing lifetime. On $1 million saved, that’s an additional $200,000 simply because you put your assets in the right place.

So here’s a quick look – from top to bottom – at which types of accounts to top up first.

1 – An employer 401k or 403b up to the matching amount, assuming there is one.

2 – A traditional IRA, if you qualify.

3 – Retroactive contributions to the 401k/403b – some accountants call this backfilling or catching up on contributions.

4 – Roth IRA.

5 – 529 Accounts.

6 – Health Savings Accounts.

7 – U.S. or government savings bonds.

8 – MLPs and Muni Bonds.

9 – Taxable investments.

10 – Real property investments.

Obviously, this isn’t a one-size fits all list. You may or may not qualify for each of these depending on your personal financial situation, so check with your advisor or a financial professional to make sure.

Year-End Tax Move No. 3: Pay Yourself First, Not the Government

Years ago I made a controversial statement and it’s one that I stick by today – we each have an obligation to pay as little tax as legally possible.

To be clear, I am not talking about cheating the system or tax evasion. That’s a surefire ticket to the “greybar hotel.” Nor do I condone actively avoiding paying into the system on principle.

However, that said, I believe every investor should arrange his or her affairs so as to maximize every deduction legally entitled to them, in order to pay the absolute minimum amount of taxes required by law.

Depending on your personal situation, this can be as simple or as extreme as you want to make it.

For example, you could move overseas and gain a tax exemption on foreign-earned income of up to $100,800. Or you could move to Puerto Rico and pay zippo on investment income and corporate dividends – if you wanted to take things that far.

Obviously that’s not practical for most people, but that doesn’t render the concept moot either.

My point is that you want to re-orient your thinking so that you are paying yourself “first” rather than the government.

There are a lot of other ways to pay yourself “first” that don’t involve moving or creatively channeling money to the Caymans. And they’re written right into the U.S. tax code.

If you’re lucky enough to be employed by a company that offers a 401k retirement savings account, you have the option of paying yourself first… automatically, with every paycheck. Anything you deduct from your paycheck to go straight to your retirement savings is pre-tax. That means you can set aside a portion of your income to grow with the markets over the decades, without paying Uncle Sam until you choose to cash out, hopefully at the 59 ½ year benchmark where it’s most advantageous for you to do so.

You will, however, have to pay taxes when you cash out your 401k. If you’d rather not face the uncertainty of not knowing what taxes will be like decades from now, consider setting up a Roth IRA, which is post-tax but comes with the wonderful advantage of letting its users cash out without being subject to additional taxes at a time when our leaders are determined to raise them.

Finding money in your budget to pay yourself first can be tough, especially these days and especially if you’re used to buying groceries, dinner, movies, ski tickets, gas and dozens of other things you need before the month is out. The vast majority of people are used to investing what’s “left.”

As a result, they’re constantly dipping into their emergency savings or cannibalizing their retirement to handle the unexpected – including taxes, which is why I’ve mentioned this today.

Year-End Tax Move No. 4: Give Big – Now OR Later

Americans give several hundred billion dollars to charity every year, with much of that taking place at the tail end of any given year. It’s simple to drop a check in the mail by December 31 or make a charitable donation using a credit card within the calendar year.

And if you’re not ready to make your move now?

Most investors are unaware that they can set up a donor-advised fund with their broker for as little as $5,000. That way you get the upfront deduction that can be itemized as part of your tax return, yet your money is still invested even if you’re not sure which charities will receive it at a later date.

This is a particularly good strategy for investors with big gains who would like to contribute securities rather than cash while also avoiding the capital gains taxes that would otherwise apply on the appreciation.

Until next time,

Keith Fitz-Gerald


Source: Total Wealth Research