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Year-End Financial Planning: Tax Cutting Tips

by on December 22, 2013 9:00 AM

After the Christmas holiday winds down, 2014 will be right around the corner.

With one week left in the year, what can you do to help yourself tax-wise and investment-wise in the New Year?

Before the end of any year, take time to call or even meet with your accountants to check on your taxes. They can offer sound advice based on your specific situation. However, there are some general ideas for saving on taxes and helping with retirement planning.

Charitable giving is a great way for you to do well while doing good. The key is that charitable gifts can be given in a variety of ways that can increase the tax advantage to you and still fully benefit the charity.

Typically, a gift is given to a charity through a cash or check donation. The important thing in gifting under any circumstances is to check that the charity is a qualified 501(c)(3) under IRS rules. A charitable organization must apply to the IRS and meet certain guidelines to qualify donations for a tax deduction. If you gift to a 501(c)(3) charity, they should send a letter clarifying the gift for you to keep for your tax records to qualify the deduction for tax purposes.

There are other ways to give charitable gifts that can further benefit you and the charity. If you are low on cash, an alternative way to give to charity is through the donation of appreciated securities. If you have taxable accounts (non-retirement) with a holding (mutual fund or stock) with large unrealized capital gains, it makes sense to gift the security rather than cash.

You get the full market value of the gifted security while avoiding the capital gains on the appreciation. If you have an IRA and must take Required Minimum Distributions (RMDs) because you are over the age of 70 ½, distributing the RMD directly to the charity will save you the Federal taxes on the distribution, a very advantageous tax-advantage. Charitable giving helps the community and can benefit you tax-wise. For a contribution to a charity to qualify for 2013, the gift must be complete by December 31, 2013.

Another way to limit your tax liability is to maximize your contributions to tax-deductible accounts, including Traditional Individual Retirement Accounts (IRAs) and employer plans. This is a way to pay yourself first rather than the government.

An employee contribution to an employer retirement plan must be done before the end of the year so you would need to act before your last paycheck for the year. An IRA has more flexibility and can be funded with as much as $5,500 ($6,500 if age 50 or over) for 2013 up until April 15, 2014. So you get an extra 3 ½ months to fully fund an IRA and see what its impact would be on your tax situation after you have an idea of your income.

Investors who are eligible for an employer plan may not be eligible to make deductible contributions to an IRA so check with your accountant to see if your Adjusted Gross Income (AGI) qualifies you for a contribution.

What if you had a bad year and don’t need to save on taxes? Perhaps you spent part of the year unemployed or your consulting income was down. It is possible to do some forward tax planning and convert your IRA to a Roth IRA. This may make sense for you given many factors.

The downside of this conversion is that all the money moved from the IRA to the Roth is taxable as income. Therefore, you need to pay taxes on the amount from money outside of retirement. The long term benefits are that a Roth continues to grow tax-deferred, any qualified distribution is tax-free and there is no required minimum distribution at 70 ½.

There are many more ways a family or individual can maximize their retirement savings and/or save on taxes. The best thing to do is to take time near the end of each year to strategize what works best with your financial advisor and accountant. That team working together can help you build your net worth through smart decisions, investment strategies and tax planning.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at [email protected]
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