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Lower Your 2013 Tax Bill with Year-End Planning

As the end of the year 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. That’s because there are a number of tax-smart strategies you can implement before year-end that may help reduce your tax bill come April 15. Dreyfus can help, working with you and your tax advisor to create strategies that are appropriate for your individual situation and level of risk tolerance. Call 1-800-443-9794 to speak with a Dreyfus Representative to learn more.
As 2013 begins to draw to a close, consider how 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% to 39.6%, and can be offset with short-term losses. Long-term gains (gains on assets held longer than a year) are taxed at a top rate of 20% and can be reduced by long-term capital losses.1 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 you should consider:
  • Avoid short-term gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term losses to offset them with, try holding the assets for at least one year.
  • Take a good look at your portfolio before year-end and estimate your gains and losses. 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 where appropriate as you can, thereby minimizing your capital gains tax.
  • Consider taking losses before 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 does not mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. 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 an investment.

IRAs: Contribute, Distribute, or Convert

Traditional IRA

One simple way of reducing your taxes is to contribute to a traditional IRA, if you are eligible and it’s appropriate for your individual situation. Contributions are made on a pre-tax basis, so they reduce your taxable income. Contribution limits for the 2013 tax year — which may be made up until April 15, 2014 — are $5,500 per individual and $6,500 for those aged 50 or older. Note that deductibility phases out above certain income levels, depending upon your filing status and if you or your spouse are covered by an employer-sponsored retirement plan.
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 each year. These amounts vary depending on your age, increasing as you grow older. If you have not taken the required distributions in a given year, the IRS will impose a 50% tax on the shortfall. So make sure you make the required minimums for the year by year-end.

Roth IRA

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. You will have to pay taxes on any pre-tax contributions and earnings in your traditional IRA for the year you convert, but withdrawals from a Roth IRA are tax-free and penalty-free as long as you’re at least 59½ and the converted account has been open at least five years. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not. The conversion will not trigger the 10% penalty for early withdrawals.

There are many steps you can take today to help lighten your tax burden. Always consult your tax advisor to review your personal tax circumstances. We can work together to find a solution that’s right for you. Call 1-800-443-9794 to get started. This information is general in nature and not intended to constitute tax advice. Please consult your tax advisor for more detailed information on tax issues and advice on your specific situation. There are fees, expenses, taxes and penalties associated with IRAs.

1 Under certain circumstances, the IRS permits you to offset long-term gains with net short-term capital losses. See IRS Publication 550, Investment Income and Expenses.

Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.

Asset allocation and diversification cannot assure a profit or protect against loss.

Main Risks
Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in the fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can produce price declines.
Equity funds are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees, all of which are more fully described in the fund’s prospectus.
High yield bond funds involve increased credit and liquidity risk compared with higher-quality bond funds. Below-investment-grade bonds are considered speculative as to the continuing ability of an issuer to make interest payments and repay principal.
Foreign bonds are subject to special risks including exposure to currency fluctuations, changing political and economic conditions, and potentially less liquidity. The fixed income securities of issuers located in emerging markets can be more volatile and less liquid than those of issuers in more mature economies.
A decline in the value of foreign currencies relative to the U.S. dollar will reduce the value of securities held by the fund and denominated in those currencies. Foreign currencies are also subject to risks caused by inflation, interest rates, budget deficits, low savings rates, political factors and government control.
There is no guarantee that dividend-paying companies will continue to pay or increase their dividends.