As the year winds down, it’s not just a time for holiday planning—it’s one of the most crucial periods for financial housekeeping. A few strategic moves before December 31st can have a significant impact on your tax bill and set your portfolio up for success in the new year.
Here are the top two areas to focus on for your year-end financial review:
1. Investment Strategies: Optimizing Your Portfolio
The final weeks of the year are the perfect time to review your holdings and make tax-smart adjustments in your taxable (non-retirement) accounts.
✅ Tax-Loss Harvesting
This is arguably the most common and effective year-end strategy.
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What it is: The process of selling investments (like stocks or mutual funds) for a loss to offset any capital gains you’ve realized this year. Capital gains are profits you make from selling assets.
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The benefit: Using losses to offset gains reduces your overall tax liability. If your net losses exceed your gains, you can even use up to $3,000 ($1,500 if married and filing separately) of the excess loss to offset your ordinary income, with any remaining loss carried forward to future years.
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The Big Rule: Be mindful of the “wash sale” rule. The IRS disallows a tax deduction if you repurchase the “substantially identical” security within 30 days before or after the sale. To stay invested, you can immediately buy a different but similar asset (e.g., a different but comparable index fund).
✅ Portfolio Rebalancing
Market movements can cause your asset allocation (the mix of stocks, bonds, etc.) to drift away from your target.
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Action: Review your portfolio and sell or buy assets to bring your allocations back in line with your long-term risk tolerance and goals. For instance, if stocks have done particularly well, you might sell some stock funds and buy more bond funds.
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Tax Tip: If you need to sell “winners” (assets with gains) to rebalance, this is a great time to pair that action with tax-loss harvesting to neutralize the tax impact.
2. Tax Strategies: Maximizing Deductions and Deferrals
Look for ways to reduce your taxable income before the calendar turns.
💰 Maximize Retirement Contributions
Contributions to tax-advantaged accounts are often the easiest way to reduce your taxable income.
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401(k), 403(b), etc.: All employer-plan contributions must be completed by December 31st. Check your payroll to ensure you’re on track to maximize your contribution limit for the year.
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Traditional/Roth IRA: Contributions can generally be made up to the tax filing deadline (mid-April of the following year), but making them now gets your money working for you sooner.
🎁 Strategic Charitable Giving
Charitable donations can offer a valuable itemized deduction.
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Qualified Charitable Distributions (QCDs): If you are age $70\frac{1}{2}$ or older and have a Traditional IRA, you can transfer up to a certain limit directly to a qualified charity. This distribution counts toward your Required Minimum Distribution (RMD) but is not included in your Adjusted Gross Income (AGI), which is highly tax-efficient.
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Donating Appreciated Stock: If you donate shares of stock or other securities you’ve held for more than a year and that have increased in value, you can typically deduct the full fair market value and avoid paying capital gains tax on the appreciation.
💸 Utilize Health Savings Accounts (HSAs)
If you have a high-deductible health plan, the HSA is a “triple tax-advantaged” vehicle you shouldn’t ignore:
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Contributions are tax-deductible.
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The money grows tax-free.
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Withdrawals for qualified medical expenses are tax-free.
Maximize your contributions before the year-end (or the tax deadline) to get the deduction.
A Critical Reminder: Every investor’s situation is unique. Before executing any of these strategies, especially those involving tax deductions or sales, always consult with a qualified tax advisor or financial professional to ensure the moves align with your specific financial goals and the latest tax code.