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Top 10 Year-End Tax and Planning MovesSubmitted by AtwoB (Point B Planning, LLC) on December 8th, 2015
Back in May, there was an “end of an era” moment in the world of late night television, as David Letterman of the Late Show hosted his final episode. During his long tenure as host of the Late Show, there was a segment that became wildly popular and eventually synonymous with the show - the famous “Top Ten List.” So in honor of the former host, here’s our “Top Ten List” of year-end tax and financial moves to consider:
Number 10 - Review your credit report. By law, you are entitled to a free credit report from each of the three credit reporting agencies - Experian, Equifax & TransUnion – annually. Check them to confirm that your information is accurate and report any discrepancies to these agencies.
Number 9 – Make charitable donations. Whether you are donating cash, tangible items such as clothing, electronics, etc., and/or appreciated securities, there’s a tremendous tax benefit for those inclined to do so. However, they must be made to a qualified charitable organization and the donations are only deductible if you itemize.
Number 8 – Defer income and accelerate expenses. Postponing taking that bonus will also delay the tax bill associated with the additional income. Expenses such as medical expenses have a hurdle, generally 10% of adjusted gross income, before you get any tax benefit. So, it’s worthwhile to bunch related expenses if you think you can surpass that hurdle. You can also prepay recurring expenses such as the monthly mortgage payment and/or property taxes since they are also generally deductible.
Number 7 – Review your beneficiaries. As it relates to your retirement accounts, estate-related documents and insurance policies, it’s good measure to check at least annually to ensure that your beneficiaries are correct, updated and align with your desired financial intentions.
Number 6 – Spend down your flexible spending account. If you have a flexible spending account, typically it’s a “use-it-or-lose-it” proposition. So don’t waste that money - use it before the year is over.
Number 5 – Consider contributing to and/or setting up a 529 plan. A 529 plan is a great way to save for college as after-tax contributions grow in a tax-deferred manner and are free from taxes if used for “qualified education expenses”. Many states also provide a tax benefit for contributions made into a 529 plan. Federal gift rules apply.
Number 4 – Max-out your retirement contribution. For IRAs, you have until when you file your taxes in April to make contributions, but for 401(k), 403(b) and most 457 plans, you have until end of the calendar to make additional contributions, if permitted by your company. The 2015 contribution limit is $18,000 for 401(k) plans (with an extra $6,000 catch-up contribution option for those ages 50 and older) and $5,500 for IRAs (with an extra $1,000 catch-up contribution option for those ages 50 and older). There are income limits that apply to IRA contributions and deductibility, if applicable.
Number 3 – Take your required minimum distribution. In the year after the year you turn 70 ½, you must begin to take RMDs from your IRA(s) and/or retirement plan account(s) - with the exception of Roth IRAs. Unless it’s your first annual RMD, the RMDs must be made by the end of the year. The penalty is severe for not taking the RMD – a 50% tax on what should’ve been withdrawn.
Number 2 – Harvest losses in your portfolio. Harvesting losses will offset any realized gains in your portfolio that would otherwise be taxed. You are also permitted to deduct up to $3,000 of realized losses against income on your tax return. Any excess realized losses can be carried-forward into future years to offset realized gains.
Number 1 – Make an appointment to see your financial advisor and/or accountant. As you reflect back on the year that just passed and look ahead into the next, it’s worthwhile that you review your financial plan and goals to make adjustments as needed. The turn of the year is a perfect time to revisit your plan, get ready for tax season, and get the New Year off to a great start.