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Wealth Matters

This is a monthly column from advisers at Willow Creek Wealth Management Inc. (willowcreekwealth.com, 707-829-1146) in Sebastopol. Bruce Dzieza, CFP, is a certified financial planner, founder of Willow Creek and has been in practice since 1984. He has been recognized as one of Barron’s Top 100 Independent Financial Advisers nationwide.

As year-end draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than now. That’s because there are a number of tax-smart strategies you can implement now that will reduce your tax bill come April 15.

The following strategies might help to lower your taxes.

PUT LOSSES TO WORK

If you expect to realize either short- or long-term capital gains, the IRS allows you to offset these gains with capital losses. Short-term gains (gains on assets held less than a year) are taxed at ordinary rates, which range from 10 percent to 39.6 percent, and can be offset with short-term losses. In most cases, long-term gains (gains on assets held longer than a year) are taxed at a top rate of 20 percent and can be reduced by long-term capital losses. To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year’s tax return and carry forward any unused losses for future years.

Given these rules, there are several actions to consider:

Avoid short-term capital gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term capital losses to offset them, try holding the assets for at least one year.

Review your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. But most capital gains and losses will be triggered by the sale of the asset, which you usually control. The important point is to cover as much of the gains with losses as you can, thereby minimizing your capital gains tax.

Consider taking capital losses before capital gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.

When evaluating whether or not to sell a given investment, keep in mind that a few down periods don’t mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to fluctuations. Likewise, a healthy unrealized gain does not necessarily mean an investment is ripe for selling. Remember that past performance is no indication of future results; it is expectations for future performance that count. Moreover, taxes should only be one consideration in any decision to sell or hold investments.

IRA: CONTRIBUTE, DISTRIBUTE OR CONVERT

One simple way of reducing your taxes is to contribute to a traditional IRA, if you are eligible. Contributions are made on a pretax basis, so they reduce taxable income. Contribution limits for the 2016 tax year — which may be made until April 17, 2017 — are $5,500 per individual and $6,500 for those aged 50 or older.

An important year-end consideration for older IRA holders is whether or not they have taken required minimum distributions. The IRS requires account holders aged 70½ or older to withdraw specified amounts from their traditional IRA annually. These amounts vary depending on your age, increasing as you age. If you have not taken the required distributions in a given year, the IRS will impose a 50 percent tax on the shortfall. So make sure you make the required minimums for the year by year-end.

Wealth Matters

This is a monthly column from advisers at Willow Creek Wealth Management Inc. (willowcreekwealth.com, 707-829-1146) in Sebastopol. Bruce Dzieza, CFP, is a certified financial planner, founder of Willow Creek and has been in practice since 1984. He has been recognized as one of Barron’s Top 100 Independent Financial Advisers nationwide.

Another consideration for traditional IRA holders is whether to convert to a Roth IRA. If you expect your tax rate to increase in the future — either because of rising earnings or a change in tax laws — converting to a Roth may make sense, especially if you are still a ways from retirement.

Regardless of what Congress does in the future, there are many steps you can take today to lighten your tax burden. Check with your tax professional if any of these strategies can work for you.