As 2015 comes to a close, it's important to finish out the year on a high note -- especially when it comes to your finances. From your investments, to your benefits at work, to year-end tax planning, here are five suggestions from our contributors that can help you do just that.
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Selena Maranjian: A smart thing for stock investors to do as the end of the year approaches is to assess your capital gains and losses, realized and unrealized. (An unrealized gain or loss is one that hasn't actually occurred because you haven't sold the stock yet -- but it's what you would gain or lose if you sold right now.) If you're sitting on a lot of capital gains because you sold a large amount of appreciated stock in taxable accounts, you've probably got a hefty tax bill coming your way.
You can shrink that tax bill, though, by offsetting some or all of your capital gains with capital losses. Uncle Sam lets you do that, but he does make it a bit tricky. First, know that your long-term capital gains, stemming from assets you held for more than a year, are taxed at 15% for most of us, while some high earners can pay 20% or more. Short-term gains are taxed at your ordinary income tax rate -- which can approach 40%, if you're a very high earner. Because of this tax difference, you can't just choose which losses to apply to which gains.
You must first subtract short-term losses from short-term gains and subtract long-term losses from long-term gains. Then you can subtract any remaining net losses from remaining net gains. If your losses for the year exceed your gains, you're allowed to take a deduction against your income of up to $3,000 ($1,500 for those who are married and filing separately). If those excess losses exceed $3,000, you can carry them forward to future years. No capital losses will be wasted this way. If you're sitting on big enough capital losses, you may be able to reduce your capital gains taxes to zero. So don't just expect a big capital tax bill -- see if you can shrink it.
Jason Hall: Millions of Americans are going through Open Enrollment right now, and the majority of them will fly through it, mainly renewing basic benefits like health insurance, while skipping over the rest.
If that's the case for you, then you're probably leaving money on the table.
One great benefit more people should take advantage of is the flexible spending account, or FSA. There are two kinds of FSAs: a Health FSA and a Dependent Care FSA. If your employer offers these benefits to you, it's probably worthwhile to take advantage of them, for two reasons:
- You have full access to the entire sum starting at the beginning of the year.
- The amount you contribute is deducted from your taxable income, meaning you'll pay fewer taxes.
A Health FSA allows you to set aside up to $2,550 toward many common medical expenses such as doctor copays, prescriptions, and other covered costs. Depending on the number of dependents you have, you may be able to set aside up to $6,000 in a Dependent Care FSA toward qualified dependent care expenses, such as day care.
In summary, if you're spending money on healthcare and dependent care today, these programs could be worth more than $1,200 in tax savings for a family with two kids. If these programs are available to you, contribute at least what you're spending in these categories. If you don't, then you're just paying more in taxes than you have to.
Adam Galas: One piece of advice I have for investors is to start saving to max out the 2016 $5,500 contribution limit for their Roth IRAs ($6,500 if you're 50 or over).
That's because the Roth IRA is without a doubt the best deal in retirement savings. Consider that any gains from money invested in a Roth won't be taxed so long as you withdraw it after turning 59.5.
That means even if you invest in the next Apple, Microsoft, Netflix, or Disney and manage to earn millions in profits over 20, 30, or 40 years, Uncle Sam won't get a dime of it. Even once you die, your heirs usually don't have to pay taxes on your account.
Another great benefit to the Roth is the that unlike an IRA or 401(k), there are no required minimum distributions, or RMDs. For example, say you're 71 years old and your IRA or 401K is worth $1 million. Even if you don't need or want the money to live on, the government will require you to withdraw a minimum of $37,735.85 in 2016, and pay taxes on it.
Roth IRAs have no RMDs, which means you have the opportunity to let your Roth keep growing if you don't need it and thus leave your loved ones a larger inheritance. If your Roth is invested in high-yielding dividend stocks, then you have the option to let your Roth continue to grow in value and benefit from extra tax-free income during your golden years.
Matt Frankel: One thing I like to do as the year comes to an end is to rebalance my portfolio.
Let's say you invested $10,000 evenly among five stocks at the beginning of 2015 Wells Fargo, Chevron, Pfizer, Netflix, and Keurig Green Mountain. Here's how you would have fared:
While you would have had a pretty good year overall, up more than 15%, the problem is that your portfolio is much too dependent on Netflix now. If your portfolio looked like this one and Netflix crashed in 2016, it could be devastating. Conversely, if Keurig Green Mountain performs well in 2016, it wouldn't mean much to you since it makes up such a small percentage of your portfolio.
This is where rebalancing comes in. In this case, I would sell about half of my position in Netflix to lock in some gains and bring the allocation back down to 20%. And as long as I still like Chevron and Keurig Green Mountain as long-term investments, I would use my proceeds to bring those stocks closer to 20% of the total.
Rebalancing allows you to lock in your winners and prevents you from being too dependent (or not dependent enough) on any one stock.
Dan Caplinger: One thing that's smart to do this time of year is to look at how much you're likely to have in itemized deductions. Depending on whether the total is more or less than the standard deduction, which is $6,300 for single filers and $12,600 for joint filers in 2015, there are some strategies you can use to make the most of it.
If your itemized deductions are fairly close to the standard deduction, then you can take steps to double-up on common annual deductible items to boost you over the limit. Things like paying real-estate or state income taxes early can put two years' worth of deductions into a single year, helping vault your total itemized deductions above the standard amount. Making early charitable gifts for 2016 can also boost your deductible total.
Alternatively, if you can push certain deductions into next year, you can take advantage of the standard deduction this year while maximizing your itemized deductions for 2016. You don't generally have the same flexibility with delaying real-estate tax or income tax payments without penalty, but discretionary moves like waiting until January to make charitable gifts can be a viable strategy.
If you're way over or way under the standard deduction, then this strategy won't make much of a difference. But for those who are close to the line, this simple step can give you more in deductions over time than you'd get otherwise.
The article 5 Year-End Money Tips originally appeared on Fool.com.
Adam Galas has no position in any stocks mentioned. Dan Caplinger owns shares of Apple and Walt Disney. Jason Hall owns shares of Apple, Netflix, and Wells Fargo. Matthew Frankel has no position in any stocks mentioned. Selena Maranjian owns shares of Apple, Microsoft, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, Walt Disney, and Wells Fargo. The Motley Fool owns shares of Microsoft and has the following options: short January 2016 $52 puts on Wells Fargo. The Motley Fool recommends Chevron and Keurig Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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