As the end of the year approaches, it’s the perfect time to take control of your finances and set yourself up for success in the coming tax season. For W2 nurses, understanding strategies like tax loss harvesting and taking proactive steps now can help you minimize your tax liability and maximize your savings.
What Is Tax Loss Harvesting?
Tax loss harvesting is a strategy that allows you to sell investments at a loss to offset capital gains and potentially reduce your taxable income. It’s particularly beneficial if you have investments that didn’t perform as expected this year.
Here’s how it works:
- Capital Gains vs. Capital Losses: When you sell an investment at a profit, you incur a capital gain, which is taxable. Selling an investment at a loss creates a capital loss, which can offset those gains.
- Offsetting Ordinary Income: If your losses exceed your gains, you can use up to $3,000 of those losses to offset ordinary income. Any unused losses can be carried forward to future tax years.
How to Do Tax Loss Harvesting Step by Step
- Review Your Portfolio: Look at your taxable investment accounts to identify underperforming assets that you might consider selling.
- Evaluate Your Gains and Losses: Calculate your realized capital gains for the year. This will give you an idea of how much loss you might need to offset those gains.
- Sell Losing Investments: Sell investments that have decreased in value and that you no longer want to hold. Make sure the losses are “realized” by completing the sale before December 31.
- Avoid the Wash-Sale Rule: The IRS prohibits you from repurchasing the same or a “substantially identical” investment within 30 days before or after the sale. Doing so will disqualify the loss for tax purposes. Be mindful of this when planning your trades.
- Document Everything: Keep detailed records of the transactions, including the purchase and sale dates, amounts, and reasons for selling.
- Work with a Tax Professional (Optional): If you’re new to tax loss harvesting, consulting a financial advisor or tax professional can ensure you’re doing it correctly.
Other Year-End Tax Moves for W2 Nurses
Beyond tax loss harvesting, here are some other steps you can take before December 31 to prepare for tax season:
1. Max Out Retirement Contributions
- 401(k): Contribute up to $22,500 for 2024 (or $30,000 if you’re 50 or older).
- IRA: You can contribute up to $6,500 to a Traditional or Roth IRA ($7,500 if you’re 50 or older). Contributions to a Traditional IRA may be tax-deductible depending on your income.
2. Check Your Withholding
Review your most recent paycheck and ensure you’re withholding the right amount of taxes. Use the IRS’s Tax Withholding Estimator to make adjustments if needed.
3. Use Your FSA Funds
If you have a Flexible Spending Account (FSA) for healthcare or dependent care, make sure to use those funds before the deadline (typically December 31, but some plans allow a grace period or rollover).
4. Make Charitable Contributions
Donations to qualified charities are tax-deductible if you itemize your deductions. Be sure to get a receipt for your records.
5. Prepay Certain Expenses
Consider prepaying deductible expenses, such as property taxes or medical bills, to reduce this year’s taxable income.
6. Organize Your Documents
Gather all necessary tax documents, such as W-2s, 1099s, and receipts for deductible expenses. Staying organized now will save you time and stress during tax season.
7. Plan for 2025 Tax Brackets
Keep in mind that marginal tax rates are expected to revert to pre-2017 levels in 2025 unless new legislation is passed. This might affect your overall tax strategy for the coming years.
Why These Steps Matter for Nurses
As a W2 nurse, your time is precious, and your income might fluctuate depending on overtime, bonuses, or shifts worked. Proactive planning ensures you’re not overpaying taxes and helps you keep more of your hard-earned money.
By understanding tax strategies like tax loss harvesting and taking action before the year ends, you’re not just preparing for tax season—you’re taking control of your financial future.
