6 Tips for Tax-Smart Investing / Good planning now could potentially reduce your tax bill this spring.

Teri Cettina for Wells Fargo Conversations writes: Autumn is the prime time for smart investors to start their tax planning. After all, most investment purchases or sales need to be completed by Dec. 31 to have an impact on the current tax year.

This year may be a particularly good one to consider how your investment strategies may impact your tax situation, says Darrell Cronk, Deputy Chief Investment Officer for Wells Fargo Private Bank. "We're in the midst of the fourth-longest bull market in U.S. history, and for much of the year, market volatility has been relatively low. Because investments have been earning so nicely, some of them may begin issuing pent-up capital gains distributions." And big capital gains payouts can quickly translate into hefty tax bills for investors if they're not careful, says Cronk.

Here are six ways to help make your overall investment strategy as tax-friendly as possible:

1. Spread gains over multiple tax years. If you plan to sell an investment that has appreciated significantly, consider selling some of it in December and the rest in January. That way, your capital gains taxes are spread out over two tax years instead of one, and you may be able to avoid bumping yourself into a higher tax bracket.
2. Consider tax-loss harvesting. This can be a tricky strategy, so it's usually wise to undertake it with the help of your financial team, says Cronk. If you have investments that are now worth less than you paid for them, you may wish to sell them before year-end so you can report the loss on your upcoming tax return. It's especially helpful to strategically harvest tax losses in years when you will also have significant taxable gains to report. Those losses help offset your gains and reduce your taxable income.
3. Be charitable. "When it comes to donations, cash isn't always king," says Cronk. If you have an asset with a very low cost basis (meaning you paid a low price and the asset has appreciated considerably and will therefore generate a big tax bill), consider donating the asset to your favorite charity instead of writing a check. You'll need to do so by Dec. 31 for the 2014 tax year. As a nontaxable entity, the nonprofit won't pay taxes on the investment's sale. You'll have given the organization a generous financial gift — and sidestepped some taxes at the same time.
4. Don't pay gains taxes on new-to-you investments. During the fourth quarter, many mutual funds issue any capital gains distributions and dividend income they've realized during the year, netted against any losses. "If you buy certain mutual funds at the end of the year, you didn't get the advantage of their growth, but you could still end up with a big tax liability," says Cronk. Fortunately, distribution information is announced publicly, generally on a fund's website. If you are planning a purchase, your financial team can find out which funds are planning to issue distributions by year-end, allowing you to plan when to buy funds without incurring a big tax bill.
5. Guard against excessive trading and turnover. When you buy and sell investments quickly, trying to time the market, you can tally up a big tax bill. Why? "Most of your capital gains will be short-term, which could be taxed at a rate of close to 50 percent, depending on your tax bracket," explains Cronk. On the other hand, investments you sell after holding for one year will be taxed at the maximum long-term capital gains rate of just 20 percent.
6. Pay attention to asset "location." If you have both taxable accounts and tax-advantaged accounts — like your workplace retirement plan or Individual Retirement Accounts (IRAs) — you don't need to hold the same types of investments in each. Tax-smart investors keep investments that could generate significant taxes in their tax-advantaged accounts, and lower-tax options in their taxable accounts. Your financial team can help you plan your investments to hold in the appropriate accounts, tax-wise.

The bottom line, says Cronk: "Whenever possible, try to control your own tax destiny." Of course, avoiding taxes should never be the main driver of your investment strategy. At the same time, Cronk says, there are many ways to make investment choices thoughtfully, with reducing taxes as one of several key considerations.