This time of year, it’s easy to get caught up in holiday planning and shopping, but taking a few moments to make some year-end tax moves now could make filing your return next year a much more pleasant (and less costly) experience. “With a few exceptions, almost all of the decisions that you need to make that affect your taxes have to be made by December 31,” says Mark Luscombe, a principal tax analyst for Wolters Kluwer Tax & Accounting.
Here are seven year-end financial moves to consider today:
1. Drain your use-it-or-lose it flex spending accounts. Medical expenses paid with a health savings account or flexible spending account cannot be deducted on your taxes. Still, it’s wise to use up all the money in a flexible spending account, which does not roll over year-to-year, although some companies will give you a grace period to use leftover funds through the first few months of the next year. HSA money, on the other hand, does roll over year-to-year, so if you can get a deduction by spending money outside of that account, that may be the wiser move.
2. Bunch up your medical expenses. If you had a high-cost medical event this year, you may be at or near the threshold required for a tax deduction. To write off your medical expenses, you’ll need to have spent more than 10 percent of your adjusted gross income on taxes, or 7.5 percent if you or your spouse are over age 65.
If you’re near the limit but expect your expenses to be lower next year, booking additional appointments, such as a dental procedures, before the end of the year could put you over the line for the deduction. If you’ve already passed the threshold, scheduling appointments before year-end will ultimately make them cost less.
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3. Make some charitable contributions. You can usually deduct gifts made to qualified charities. Check the IRS Website to be sure that a charity is eligible, and get a written statement from the organization verifying the gift. If you’re missing documentation for a gift given earlier in the year, take time now to contact the charity for it before they get slammed with requests at tax time.
You can also get credit for donating household goods like furniture or clothing. Items worth more than $500 require an appraisal. “Donated items are usually worth less than you think,” says Annette Nellen, professor of accountancy and taxation at San Jose State University. “It’s worth what you’d get for it at a garage sale.”
Another tax-efficient way to give to charity is to donate shares of appreciated stock. You can take the deduction for the value of the donated shares without having to pay capital gains on the appreciation.
4. Max out your retirement accounts. Contributing as much as possible to your retirement accounts has the double benefit of saving you money on your taxes now (contributions lower your taxable income) and setting you up for a more comfortable retirement.
Participants in a 401(k) or 403(b) plan can set aside up to $18,000 a year, and those age 50 or older can stash another $6,000 in “catch up” contributions. “You can make changes at any time to your 401(k) contributions, so there’s still time to max out those accounts,” says Paul Jacobs, chief investment officer at Palisades Hudson Financial Group.
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The contribution limit for an traditional IRA is $5,500 ($6,500 for those over age 50), but those amounts begin phasing out out for married couples making more than $183,0000, or for those who have access to a workplace retirement plan. (You have until April 15 of next year to put money into an IRA account.)
5. Harvest tax losses (or make use of older ones). The stock market has had a wild ride this year. If you’re sitting on losses, you can sell those investments to offset either capital gains on other investments or your regular taxable income (in the case of regular income, you can apply up to $3,000 of the loss in a single year). Bonus: Any losses you don’t use now against other income can be carried forward to offset gains in future tax years. In order to get the tax benefit, you can’t buy back the shares you sold for at least 30 days.
Despite the potentially valuable tax savings, you shouldn’t make stock sales solely for tax purposes, says Troy Lewis, a CPA in Draper, Utah, and chair of the tax executive committee at the National Institute of Certified Public Accountants. “But if you’re otherwise inclined to not want to keep certain stocks, now’s the time to sell those so that the loss can be offset with gains.”
Some taxpayers still have big loss carryovers from the recession. Using them to offset any capital gains this year could make a bigger difference to you tax picture than simply applying them to ordinary income.
6. Take your required minimum distribution. If you’re over age 70 ½, you’ll need to be sure to take the required minimum distribution from any retirement plan except for a 401(k) at a company where you’re currently employed. You’ll have to pay ordinary income taxes on the money you take out, but not taking one will result in a tax penalty of 50 percent plus interest on withdrawals you should have taken.
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The amount you must take is calculated based on your account balance and your life expectancy, but generally your account provider will calculate what you need to withdraw each year. Look at the required withdrawal strategically, using it to adjust your asset allocation and get rid of any dogs in your portfolio.
7. Consider a 529 contribution. If you’re saving for college for children or grandchildren you may be able to get a deduction on your state income taxes. The rules vary by state (check out yours here), with some states offering no tax benefits and other implementing no limit on contributions. There’s no federal tax deduction for money put into a 529 account, but balances grow tax-free, and there are no taxes on withdrawals made for qualified education expenses.
