What has changed for you in 2014? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2015 begins.
Even if your 2014 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.
Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.
In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.
Do you itemize deductions? Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction, a homebuyer credit… there are so many deductions you can potentially claim, and now is the time to meet with your tax professional so that you can strategize to claim as many as you can.
Could you ramp up 401(k) or 403(b) contributions? If you can do this in December, that will lower your taxable income for 2014. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so those Roth account contributions won’t lower your taxable income for 2014 (they will still help to build your retirement savings).
Are you thinking of gifting? How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2014 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.
If you donate appreciated stocks you have owned for at least a year, you can take a charitable deduction for their current value and forego the capital gains tax hit that would result from their sale. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).
Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2014 and 2015. So as an individual, you can gift up to $14,000 to as many people as you wish this year and next. A married couple can gift up to $28,000 to as many people as desired this year and next.
While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.
Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday… and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.
Can you take advantage of the American Opportunity Tax Credit? Now in place through 2017, the AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.
What can you do before they sing “Auld Lang Syne?” Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.