Now Is A Good Time to Consider Year-End Tax Moves

With about five weeks left to go in 2015, now is a good time to give your tax situation a review. You will have enough time to take any desired action if you analyze your taxes now. You’ll also have the ability to start planning for 2016.

A good place to start is to look at your capital gains and losses both realized and unrealized. You can offset realized gains by selling investments that have declined in price since purchase. While we do not recommend letting the tax tail wag the portfolio dog, investing is messy and allowing for some flexibility to take advantage of opportunities that fit within your long-term strategy can help you achieve better long-term returns. Plus, if the investment otherwise violates your sell rules, the ability to reduce your tax bill can be the incentive to follow your portfolio rules. If the investment has long-term appeal but has fallen in price enough to make it worthwhile to realize the loss, wait at least 30 days to repurchase it to avoid incurring the wash-sale rule. Be careful of the dividend dates since you must hold a stock for 61 consecutive days surrounding the ex-dividend date. The ex-dividend date is commonly two trading days prior to the date of record for being eligible to receive the dividend.

Don’t forget to check your mutual fund for any distribution declarations. Mark Wilson at CapGainsValet.com told me that this year is running about average in terms of mutual fund distributions. He estimates about 325 mutual funds will make distributions of at least 10% of their net asset value (NAV) this year, down from more than 500 last year. Wilson is seeing more funds distributing in excess of 30% this year, however. Keep in mind that both exchange-traded funds and closed-end funds can also make taxable distributions, so follow up with any of these types of funds you hold as well.

This brings up the subject of asset location. Put your most tax-efficient assets—index stock funds, long-term stock holdings, municipal bonds, etc.—in your taxable accounts. Use your tax-advantaged accounts (individual retirement accounts, Roth IRAs, etc.) for your least tax-efficient assets—corporate bonds, real estate investment trusts, preferred stocks, etc.

Speaking of IRAs, you have until April 18, 2016, to make a deductible contribution to a traditional IRA. That is not a typo. Emancipation Day will be observed on April 15, 2016, in Washington D.C., so the deadline for filing 2015 taxes and making IRA contributions is extended by three days. (Residents of Massachusetts and Maine can file taxes on April 19, 2016.)

If you have any known medical expenses coming up—such as hearing aids, dental work or another medical procedure—that you have the luxury of scheduling, consider whether you want to incur the expense this year or next year. Do so now, because you will need enough time to schedule the doctor’s appointment or procedure or purchase the medical equipment. Those of you who are 65 or older should pay attention to the upcoming expiration of the 7.5% hurdle for deducting medical expenses. Starting in 2017, medical expenses have to exceed 10% of income before they can be deducted. Those under 65 already face the 10% hurdle. If you have a flexible savings account, be aware of your employer’s rules for carrying over any used balances into 2016.

Any other deductible expense that requires scheduling should also be planned for now.

Charitable gifts have to be made before the end of this year to be eligible as 2015 deductions. You’ll need an acknowledgement of cash donations in excess of $250.

Finally, Intuit has released new versions of Quicken and TurboTax. I bring this up for two reasons. First, the company is selling its Quicken software unit and I have no idea what is going to happen next year. As someone who has used Quicken for more than 20 years, I plan on upgrading this year to ensure I have the latest version given the uncertainty of the product. Secondly, Intuit has apparently learned its lesson and is re-incorporating Schedule D into TurboTax Deluxe after trying to get users to buy a more expensive version of the software program last year. I did try H&R Block’s tax software last year after getting frustrated with Intuit. The interface was not as polished as TurboTax, though it did give me the same result as TurboTax. If you prefer TurboTax, but H&R Block is cheaper, try calling Intuit; last year they willingly price-matched when I asked them to.