Westward Group for Tax and Estate Planning Advisors Tokyo Paris Review: 5 Year-End Tax Tips for Investors

On top of holiday preparations and celebrations in December, there are some year-end financial tasks that require attention. Many of those tasks on the financial to-do list have a tax component – specifically, avoiding unnecessary taxes on your investments, or worse, incurring a penalty.

Here are some reminders of tax consequences to consider before the new year rolls around:

1.Watch taxes on mutual funds. Mutual fund managers regularly sell securities to rebalance or accommodate shareholder redemptions. That creates capital gains for shareholders, even those with an unrealized loss on their mutual fund investment. This is particularly true for actively managed mutual funds, which have greater turnover than index funds.

But even if you are the owner of a mutual fund with overall gains, you may have a tax consequence for gains that occurred before you purchased it.

2. Don’t forget about required minimum distributions. By April 15 of the year after you turn 70½, you are required by the Internal Revenue Service to take a minimum distribution from qualified retirement plans, such as a traditional individual retirement account.

However, after that first year, your deadline for taking your distribution becomes Dec. 31. If you forget to take the distribution, you face an IRS penalty of 50 percent. In other words, if your distribution amount is $5,000, you would be hit with a $2,500 penalty. That’s on top of the taxes you already pay on the distribution.

3. Don’t let tax considerations get in the way of your investing goals. While it’s imperative to have a tax strategy, always keep your investing objectives front and center. Jeanie Wyatt, CEO and chief investment officer at South Texas Money Management, headquartered in San Antonio, says decisions about when to buy or sell investments are often obscured by worries about tax consequences. 

“In those situations, where people don't sell because they are going to have a tax cost, that can be a bad decision,” she says. “You really have to know that the investment decision is No. 1 and the tax consideration is No. 2.”

4. Be cognizant of short-term capital gains consequences. A short-term capital gain is realized by the sale of a stock held for one year or less. These gains are taxed at the same rate as an individual’s ordinary income.

A short-term gain can be reduced by a short-term loss. As much as $3,000 per year can go toward reducing taxable income. Additional losses may be carried forward into subsequent years to offset $3,000 in ordinary income or capital gains.

5. Plan for future tax increases. Having a strategy for 2015 and beyond is crucial, says Beau Henderson, founder and CEO of the RichLife Group in Gainesville, Georgia. “One of the thieves that can steal your rich life is the real threat of future tax increases,” he says.

People who have accumulated a sizable nest egg in their qualified retirement accounts will likely face a hefty tax bill when they start taking distributions. Henderson says effective planning today could potentially mean a lower tax bill down the road. “What if instead of pulling money out at a 35 percent tax rate, when you actually need to retire, it's taxed at 60 percent? That would affect your plan,” he says.