My grandfather once explained to me the difference between knowledge and wisdom: Knowledge is knowing that tomatoes are fruit, but wisdom is knowing that you should not put tomatoes in a fruit salad. Very wise. And when it comes to investing, you want to be savvy about what you’re doing, including lowering taxes on your portfolio. Here are a dozen tax-saving measures investors should consider before the end of the year.
Asset allocation and location. The end of the year is a good time to consider rebalancing your portfolio in order to adjust your asset allocation and therefore your level of risk until 2022. As for the location of the asset, consider holding Highly taxed interest-bearing investments in your registered plans (such as a registered retirement savings plan). a registered education savings plan, a registered retirement income fund, a tax-free savings account or a registered education savings plan) where possible, where this income will be protected tax. Outside of your registered plans, you will generally want to hold growth investments because capital gains are more tax efficient.
Investment costs. You can deduct investment advisory fees, interest on investment loans and other finance charges if they relate to non-registered investments and you pay them before the end of the year. Sorry, but the fees for your registered plans are not deductible.
Interest deductibility. If you are paying non-deductible interest charges, consider using cash or other investments to pay off your non-deductible debt, and then re-borrow to replace those investments in order to earn income. When you borrow to earn investment income, you will be able to deduct your interest charges. Do this before the end of the year to maximize interest deductions for this year and for the future.
Realize capital gains. If you plan to sell an investment before the end of the year with a profit, you may want to delay this until January so that your capital gain is not taxable until 2022. On the other hand, if you have capital losses to use, have very little other income, or if you’re worried about capital gains tax rates going up next year, it may be a good idea to sell before the end of the year .
Realize capital losses. If you have investments that have lost value, it might be a good idea to realize those capital losses before the end of the year if you have capital gains this year, or in the past three years (2018, 2019 or 2020), to offset these losses. This could allow you to recover taxes that you might have paid before.
Capital gains reserves. You may be able to defer capital gains tax, by claiming a capital gains reserve, when you have sold an asset and receive the proceeds for more than one year (the maximum deferral is five. years). If you are concerned that capital gains tax rates will increase in the future, it might be a good idea to pay tax on more of your capital gains today (i.e. say to claim less of a reserve) to take advantage of current capital gains tax rates.
Time your investments. If you plan to invest in a mutual fund, consider waiting until 2022 if the fund is likely to make a taxable distribution before the end of 2021. Otherwise, you will pay tax sooner than necessary. Also, if you plan to invest in an interest-bearing security with a maturity of one year or more, consider waiting until 2022. This way you won’t have to pay tax on the securities. interest accrued until 2023 – the year of the first anniversary of the investment.
Option contracts. If you have options contracts with accumulated capital losses, consider closing those contracts before the end of the year. You can use those losses to offset capital gains this year, or in 2018, 2019, or 2020.
Donate titles to charity. Charities need our help more than ever. Consider donating qualifying securities that have appreciated in value since our tax law will eliminate the taxable gain on those securities, in addition to providing tax relief for the donation itself – a double benefit. Do it before the end of the year for 2021 tax savings.
TFSA withdrawals. If you’re 18 or older, consider contributing to a TFSA to use your accumulated contribution room. And if you plan to withdraw from your TFSA soon, consider doing so before the end of the year, as withdrawals are only added to your TFSA contribution room at the beginning of the year following the withdrawal.
Home Buyers’ Plan. If you are thinking of making a withdrawal from your RRSP under the Home Buyers’ Plan, consider waiting until after the end of the year to extend the period to buy your home and repay the amounts by one year. withdrawn.
Give investments to a child. If you have investments that have lost value, consider giving them to a child before the end of the year. You will be allowed to deduct the capital loss to offset the capital gains, and you will transfer any future taxes payable on future growth to your child. You will also minimize probate fees at the time of death since you no longer own the assets.
Tim Cestnick, FCPA, FCA, CPA (IL), CFP, TEP, is author, co-founder and CEO of Our Family Office Inc. You can reach him at [email protected].
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