At year-end, there are several financial moves which can be particularly beneficial. We list a few here, as a reminder:
(a) Charitable Gifts – in order to get the tax break for making gifts or donations to charities, they must be completed by year-end. See A Powerful Tool for Charitable Gifts – the Donor-Advised Fund for more about a great option.
(b) Accelerating tax deductions – various tax-deductible expenditures may be accelerated into the current year, such as making estimated state income tax payments, or if you have enough deductible expenses to get over a threshold one year but not another, bunching those expenses up (such as medical expenses for which one must exceed a 10% of AGI threshold)
(c) Capital-Loss “harvesting” – if you have investments which have gone down (less likely in 2013!) selling them at a loss, even if one is intending to be fully invested and will use the proceeds to buy something relatively similar, can be a powerful way to take advantage of the tax code. If you have capital gains, these losses can be used to offset them, thus reducing your taxable income immediately. Moreover, up to $3000 of capital losses may be deducted against ordinary income each year, and finally, any such losses which are not used in the current year to offset income are carried forward and never expire. Just be careful of the wash sale rule.
(d) Establishing a Solo-401(k) – if you have self-employment income, and especially if your self-employed business has no other employees besides yourself and your spouse, you may be able to save a very substantial portion of that self-employment income in a special simplified form of the 401(k) retirement account. A “solo” or “individual” 401(k) may allow one to put away not just pre-tax income, but also after-tax Roth contributions, as well as “catch-up” contributions if one is 50 or over. Like a SEP-IRA, one doesn’t generally need to make the contributions until tax-time, but unlike a SEP-IRA, if you plan on contributing to a Solo 401(k), the accounts themselves have to have been established before the end of the year for which you’d like to make contributions. If you have any self-employment income and there’s a chance you may want to do this, we encourage you to contact us as soon as possible, as it may take a couple of weeks to get the paperwork in order!
(e) RMDs – Required Minimum Distributions – if you are over 70 (in particular, if you over 70-1/2), and you have any retirement accounts, you are likely required to make Required Minimum Distributions. The amount you need to take, and therefore pay taxes upon, varies based on your age, the value of your holdings at the previous year-end, and, possibly, on the age of your spouse. You may take more than the minimum, but if you take less than the minimum, the penalties are very substantial — 50% of the difference! So if you are over 70 and haven’t already done so, we strongly encourage you to review and, if necessary, take your Required Minimum Distributions.