Year End Planning

Review Your Portfolio

Allowing taxes to dictate your investment strategy is rarely a good idea. But if you’re already considering selling appreciated securities or other assets, cutting them loose by year-end could save you money.

Taxpayers in higher brackets should look for losses to offset investment gains. Offsetting gains is particularly important to taxpayers in the 39.6% tax bracket (income over $406,751 for singles; $457,601 for married couples), because they face taxes of up to 23.8% on dividends and long-term capital gains, not the 15% rate that applies to most investors.

Don’t sell shares to lock in a loss with the intention of buying them back right away. The IRS “wash sale” rule bars you from claiming the loss if you buy the same or a “substantially identical” investment within 30 days of the sale.

Beware of Year-End Mutual Fund Purchases

If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price.But the IRS doesn’t see it that way. You have to report the payouts as income on your 2016 return—and pay taxes on them—even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)

Before you buy shares for a non-retirement account in December, check the fund company’s Web site to find out exactly when the dividend will be paid.

Give to a Charity

This is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only if you itemize deductions. A few bags full of gently used clothes and household items can add up to hundreds of dollars in tax deductions, but valuing those donations can be difficult.

If you donate a used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle’s fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle’s sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return. Because of previous abuses, donations of used cars and other non-cash items may attract extra scrutiny from the IRS. So keep scrupulous records.Send cash donations to your favorite charity by December 31 and hang on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you’ll also need an acknowledgment from the charity.

Feed Your 401k

Money you contribute to your 401(k) or similar employer-based retirement plan plan (if it’s not a Roth) is excluded from your income, lowering your tax bill.

If you’re not yet on track to max out your contributions by year-end, you can direct some extra dollars to your retirement plan during your last few pay periods—or, if you get a year-end bonus, use it to fatten your savings.

This year, workers can contribute up to $17,500 to employer-based plans, the same as in 2013. Workers 50 and older can contribute up to $23,000.

Penalty Proof Your Return

If you expect that you’ll owe money when you file your 2016 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now.

You needn’t pay every penny of the tax you expect to owe. As long as you prepay 90% of this year’s tax bill, you’re off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year’s tax liability.

Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2017 return, no matter how much you actually owe when you file your return.

Taxes that are withheld are treated as if they were spread out evenly throughout the year, so that approach sidesteps an underpayment penalty; the estimated-tax-payment approach does not.