Another tax season has passed and now is the time for investors to start planning for next year’s tax season. It is especially important that investors review their tax situation this year because there are a lot of changes coming in the near future due to the new tax legislation. Here are some tips to help you stay prepared in the event of an unforeseen circumstance.
Adjust Your Trading Strategy
Your trading strategy could negatively impact your tax burden. Analyze the length of time that you hold an investment. Keep in mind that investments held for less than a year are eligible for a special tax rate.
Analyze Your Portfolio
Check to see if your portfolio has made any short-term gains within the last few months. Look at your stocks, bonds, and mutual funds to see if there have been any large capital gains.
Check Your Cash Reserves Account
You must have some type of emergency savings account. Having a reliable backup plan allows you to avoid having to make quick sales from your portfolio in order to get some extra cash. Try to save cash for five to seven months worth of expenses.
Cut Your Taxable Income
If you are eligible for a 401(k) retirement plan, consider making more contributions to the plan. The assets will accumulate tax-free until you are ready to withdraw them out of the account. There is a limit on how much you can contribute to the plan. Keep in mind that while there are a lot of benefits to increasing your retirement savings account while simultaneously cutting your taxable income, your income must be stable enough to handle this strategy. You should try to avoid an early withdrawal from the account, as you could be subject to fees and penalties.
Manage The Tax Costs
As your portfolio increases, you will likely receive a tax bill. You should focus on reducing the tax costs. Don’t let your allocation overwhelm your finances.
Look At Your Philanthropic Endeavors
Read over the new tax bill closely, as you may no longer be able to itemize some of your previous charitable work. Consider merging all of your philanthropic endeavors into one transaction. You could open a donor-advised fund account which will allow you to receive a tax deduction and then you can send the funds to different charities over the next few months.
Check Your Holdings
Some of your holdings may have a high turnover ratio while paying out huge capital gains. This is not efficient, as you don’t have any control over the time frame when you get those capital gains. Look at the turnover ratio of your holdings. You may need to switch some assets into a tax-deferred account.
Avoid Alternative Assets
Avoid assets such as Bitcoin, which could leave you responsible for paying federal and state income tax. Bitcoin is considered a property instead of currency. Avoid precious metals because the IRS classifies those as collectibles.