1. Taxing matters
If you’re paying estimated taxes, now would be a
good time to review your payments, especially if you had a big change in
income from the prior year, said Paula Nangle, a certified financial
planner with Marshall Financial Group in a Doylestown, Penn. Estimated
tax includes income from self-employment, interest, dividends, alimony,
rent, gains from the sale of assets, prizes and awards. What do you need
to pay? Either 90% of the tax to be shown on your 2014 tax return or
100% of the tax shown on your 2013 tax return. And, if you figure your
payments using the regular installment method and later refigure your
payments because of an increase in income, you may be charged a penalty
for underpayment of estimated tax for the period(s) before you changed
your payments. “You’ll want to avoid under-withholding penalties and
nasty surprises when you file,” said Nangle. FYI: To learn how might be
able to avoid or reduce this penalty, read
Annualized Income Installment Method (Schedule AI). Also read
Estimated Taxes. Also check your tax withholding rate and adjust it upward or downward so that your tax payments equal roughly what you’ll owe.
2. Take your RMD
Generally,
you have to start taking withdrawals — required minimum distributions
or RMDs — from your IRA or retirement plan account when you reach age
70½ or if you own an inherited IRA account, said Daniel Galli, a
certified financial planner with Daniel J. Galli & Associates in
Norwell, Mass. And you have to do that before year-end. There are
exceptions: Roth IRAs, for instance, don’t require withdrawals until
after the death of the owner. And if you turned age 70½ in 2014, you
have April 1, 2015 to take your RMD. (If you wait, by the way, you’ll
have to take two RMDs in 2015.) If you don’t take your RMD before
year-end there’ll be a high tax penalty: It’s 50% tax on the amount you
should have taken as well as the ordinary income tax due on the
distribution. Some tricks of the trade? If you have multiple IRA
accounts, calculate your total RMD and then take the RMD from the one
that is most beneficial. “For example, this year pull from the accounts
that are ‘up’ in value rather than those that have low or negative
returns, for example domestic large-cap vs. foreign stocks,” said Galli.
Remember too that you can aggregate your IRA accounts, but
employer-sponsored retirement plans cannot be aggregated with IRAs. The
latter accounts must be treated separately, said Galli. Another trick:
If you’re still working after age 70½ and contributing to your current
employer-sponsored 401(k) plan you don’t have to take an RMD from that
account, said Galli. You only have to take RMDs from that plan until the
year that you retire.
3. Consider a Roth conversion
Crunch
the numbers to see if a Roth conversion, either with your traditional
IRAs and/or within your 401(k), makes financial sense this or next year,
said Galli. To decide consider what might happen to tax rates. Will
federal tax rates be higher or lower in years to come? Will you be in a
higher or lower tax bracket in the future vs. today? If tax rates rise
and your tax bracket will be higher, converting all or a portion of your
IRA/401(k) to a Roth could make sense, said Dustin Obhas, a certified
financial planner with CLA Financial Advisors in Chicago. Also consider
if you have the funds to pay whatever ordinary income taxes will be due.
The conversion will be consider a distribution from your IRA or 401(k).
That potential downside notwithstanding, converting all or part of
IRA/401(k) to a Roth IRA/401(k) gives you two big benefits: tax-free
growth and tax-free withdrawals. What’s more, you can recharacterize
your Roth IRA back to a traditional IRA by Oct. 15, 2015 if the
conversion didn’t make financial or tax sense; if, for instance, the
account declined in value or your tax bracket changed, said Obhas. One
other item: Having both traditional IRAs and Roth IRAs give you what
experts refer to as tax diversification. In years to come, you’ll have
the ability, if you choose, to withdraw money from whichever retirement
account provides you with the most after-tax income.
4. Maximize your retirement contributions
Contribute
as much as you can into your 401(k) this and next year, said Obhas. The
limit for 401(k) plans this year is $17,500 and $23,000 for those 50
and older. Increase also the amount you defer into your 401(k) for 2015;
the limits for 2015 are $18,000 and $24,000 for those 50 and older,
said Obhas. And if you can’t reach the max, try to contribute enough to
receive your employer’s full match. A typical match is 50 cents on the
dollar up to 6% of your contribution. And if that’s not possible, try
increasing your contribution by a little bit, even 1% if that’s all you
can swing. “It can make a big difference come retirement” said Obhas.
Speaking of contributions, don’t forget to contribute, if you’re able,
to your traditional and/or Roth IRA and your health savings account
(HSA). And if you’re self-employed, Victoria Fillet, a certified
financial planner with Blueprint Financial Planning in Hoboken, N.J.
recommends setting up and contributing to any number of retirement plan
options including a solo 401(k) or a Simplified Employee Pension (SEP)
for instance. And while you’re at it, calculate whether you’re saving
enough for retirement.
5. Drain your flexible spending account
Use
up the money in your flexible spending account (FSA). Yes, the U.S.
Treasury Department and the IRS this year changed the long-standing
“use-it-or-lose-it” rule; employers can now offer a carry-over of up to
$500 in unused health FSA funds to the following year or to continue a
grace period option giving employees a 2½ month extension to spend
remaining FSA funds, according to the Society for Human Resource
Management. But employers aren't obligated to offer the carry-over or
the grace period option. “Any optometrist, dentist, and the like can
help get money spent before year’s end,” Galli joked.
6. Review realized and unrealized gains and losses
In
nontax deferred accounts, review realized and unrealized gains and
losses and see if gains can be offset but selling some losses, said
Galli. According to the IRS, realized capital losses, generally, are
first offset against realized capital gains. And any excess losses can
be deducted against ordinary income up to $3,000 ($1,500 if married
filing separately) on line 13 of Form 1040. Losses in excess of this
limit can be carried forward to later years to reduce capital gains or
ordinary income until the balance of these losses is used up. One thing
to watch out for: Avoid the wash sale rules, said Kelly Olson Pedersen, a
certified financial planner with Caissa Wealth Strategies in
Bloomington, Minn. According to the IRS, you cannot deduct losses from
sales or trades of stock or securities in a wash sale. A wash sale
occurs when you sell or trade stock or securities at a loss and within
30 days before or after the sale you buy substantially identical stock
or securities; acquire substantially identical stock or securities in a
fully taxable trade; acquire a contract or option to buy substantially
identical stock or securities; or acquire substantially identical stock
for your individual retirement account (IRA) or Roth IRA.
Read Sale of Property.
Consider harvesting your investment gains too. “Our industry loves to
discuss the benefits of ‘tax-loss’ harvesting,” said Clemens. “However,
many retirees can now control their taxable income, and if they are in
the 15% marginal tax bracket, then their capital gains tax rate is 0% at
the federal level. With domestic stock being up the past few years,
it’s worth analyzing if gains can be harvested at the 0% rate.”
7. Donate to charity
If
you’re looking for ways to cut your 2014 tax bill and do good at the
same time, consider donating to a charity or a donor-advised fund. Of
course, if you want to claim these donations for a tax deduction, you
must itemize your deductions rather than taking the standard deduction,
said Obhas. Besides giving cash to a charity, consider donating highly
appreciated stock. “You won’t owe capital gains taxes and can deduct the
current value of the investment as a charitable gift,” said Obhas.
Obhas recommends using the IRS’
Exempt Organizations Select Check tool to make sure you’re donating to a qualified charity.
You
can cut this year’s tax bill by bunching your itemized deduction,
especially medical ones, said Clemens. “Those 65 and older still have a
7.5% of adjusted gross income (AGI) threshold through 2015 to deduct
out-of-pocket medical expenses,” he said. In addition to meeting the
threshold, medical expenses must also be paid this year; however, using a
credit card counts, Clemens said. “If one thinks they might meet the
threshold, they may want to consider year-end medical purchases they may
have been delaying,” he said. One helpful hint: Mileage primarily for
medical care counts. “Those trips to the doctor and pharmacy can add
up,” said Clemens. Also, if you’re self-employed and having a good year,
Fillet recommends making deductible purchases and payments now for next
year.
9. Review Medicare and Social Security benefits
Review
your Medicare, supplemental and prescription drug plans, and especially
the latter if you have changed medication, said Fillet. And Obhas
recommends reviewing your Social Security benefits statement, which can
be found at
my Social Security.
Also, figure out when you (and your spouse) should take your benefits,
said Obhas. The earliest is at age 62, the latest is age 70. After 70,
your benefits no longer increase. Your full retirement age depends on
the year you were born, your statement will tell you when your full
retirement age is. “Taking your benefit before your full retirement age
can limit social security strategies available to you and your spouse,”
said Obhas. “Strategies such as spousal benefit, file and suspend, and
the like should be examined.” And if you’re divorced and had been
married for 10 years or more, look into the benefits available to you.
One strategy, according to Obhas, is this: “You could delay taking your
own benefit by taking your ex-spouse’s benefit, which is one-half of
their retirement benefit. Certain restrictions apply: you must be
married for 10 years or longer, you must not be currently married, and
you must be age 62 or older.”
10. Gifting
For
those with a big estate, Obhas said gifting can help reduce a potential
estate tax bill. The federal estate tax exemption — the amount you can
leave to heirs without having to pay federal estate tax — is $5.34
million for 2014 and $5.43 million in 2015. For those fortunate enough
to worry about going over the exemption, here are some ways to help,
said Obhas: First, the annual exclusion gift. You can give a $14,000
gift to each individual. Next, consider paying someone’s college tuition
or medical bills. Of note: “Paying directly to the provider is the only
way to do this,” said Obhas. “Doing this will reduce your estate and
does not count against your annual exclusion gift. Not to mention you
could really make someone’s day by helping to pay their college or
medical costs.” Pedersen recommends contributing to a 529 plan to fund
your children’s and/or grandchildren’s college education. One way to do
this? Use your annual gift exclusion of $14,000.
11. Don’t forget the basics
The
end of the year also is a good time to review your yearly budget and
make sure you’re on track and not overspending, said Fillet. Also, check
your emergency fund. And don’t forget to review your estate documents.
Did anything in your life change? If so (and even if not), look over
your wills, trusts and beneficiary designations, and make any necessary
changes, said Obhas. “The most common oversight I see with prospective
clients is when they have children from a previous marriage and have
remarried and started a new family,” he said. “Their documents haven’t
been updated to reflect their current marriage and leave most of the
assets and decision making at death to the ex-spouse while leaving out
the current spouse and children. Which needless to say, can be very
problematic.”
Culled from Money watch
Léo Delafontaine 
