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Three Items for Your December Tax Checklist

Dec. 3, 2013
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By Laura Tanner, Ph.D, CFP® 

Learn more about Laura on NerdWallet’s Ask an Advisor

December is the time we think about shopping for gifts for family and friends.  If you get in the mindset that this is also the time to fine-tune your finances, you may have more money for gifts for next year!  Here are a couple of items to review which may help reduce your taxes.  For other ideas, please check out the  mid-year tax tips blog post.

  1. Increase or max out your retirement plan contribution through work.  For 2013, you can contribute up to $17,500.  If you are 50 or older, there is an additional $5500 of allowed contribution, for a total of $23,000.  Pretax contributions will reduce your taxable income.  In addition, all gains accumulate tax-deferred.
  2. Review and adjust withholding (W-4 form) if necessary.  Have there been any significant changes in your life?  Some examples include marriage or divorce, birth or adoption of a child, and buying a home.  Such events can affect your tax liability.  For example, with purchase of a home you will have significant deductions including property tax and mortgage interest, which will decrease your income taxes owed.  Your goal as you complete your tax return is to have paid just the right amount, with no further taxes owed and no refunds due (so that you have access to the money during the course of the year).  There is a withholding calculator available through the IRS website, or you can consult your tax accountant for help.
  3. Sell underperforming securities in investment accounts.  So far this year, the stock market has soared 26%.  If you have an investment account (non-retirement account), you may have capital gains this year.   This is considered income, and you will owe capital gains tax (Schedule D).  You can mitigate this capital gain by selling any securities (including stocks and bonds) on which you have lost money (value at sale is worth less than what you paid).  Any amount of capital loss can be used to offset capital gains, and up to $3000 in capital losses can offset income from other sources.  Unused capital losses can be used in the future (a capital loss carryover), so be sure to keep good records.

These tax tips should help you end the year more prepared for the upcoming tax season.

I want to acknowledge my colleague, James Russo, CPA, for his helpful advice on this post.