WASHINGTON — When December rolls around, do you ever wish you had more time to look over your finances and do something that would lower your taxes or put more money in your pocket before those opportunities go away at year-end?
If you answered yes, then this three-part, year-end planning series is designed to help you get started now. In this article, I focus on taxes (everyone’s favorite topic) and actions you should consider before Dec. 31.
There are some simple steps you can take right away. Others may require the expertise of a financial adviser or accountant, but their advice may be worthwhile if it lowers your tax bill.
Realize capital losses or capital gains:
If your investments have done poorly, talk to your accountant about realizing losses. This can be a great tool to offset future capital gains as well reduce your ordinary income by $3,000 a year until the losses are used up. On the opposite side of the coin, consider realizing capital gains if you have less income than usual. This lets you lock in gains while paying less in taxes.
Adjust your tax withholding:
Think back over the past year: If you got married, divorced or had another child, chances are you’ll need to adjust your withholding on your W-4. Talk to your CPA so that you don’t end up giving the government an interest-free loan or worse, owing a penalty for not paying enough tax over the course of the year.
Max out your 401k:
In 2015, you can contribute $18,000 to a 401(k), TSP, 403(b), or 457 retirement plan. Plus, if you’re over 50, you can contribute an extra $6,000. You have until Dec. 31 to max out your plan and receive the benefit of deferring your income. If you’re contributing to a Roth 401(k), you have the same contribution limits, but you’ll pay taxes on your contributions now so that all growth in the account grows tax-free forever.
If you are self-employed, consider opening up an Individual K, which is essentially a personal 401k and profit-sharing plan for those who are self-employed. For 2015, the maximum elective deferral is $53,000, or $59,000 if you are over 50. Bankrate.com has a great Self-Employed 401k Calculator to help you know how much you can contribute.
Make your state income tax quarterly payment:
If you’re writing checks for your estimated tax payments, be sure to get your fourth quarter state tax payment in before Dec. 31. This allows you to take the deduction on your 2015 tax return as opposed to waiting until 2016 if you had paid it in January.
Read: The Best Tax Strategies for a Windfall Year
Talk to your CPA about a Roth conversion:
If you had a year with less income than usual, consider a Roth conversion. We met with a client in the first part of the year who shared with us that he left his company. As a former CEO, he knew it would probably take a full year to find his next position. Without any income and living off an emergency fund, we recommended he convert part of his IRA to a Roth IRA.
In a year where they were going to be in one of the lowest tax brackets, we took advantage of this opportunity by adding income to his return. When he returns to work, this opportunity will be gone, since his salary and bonuses will push him back into the highest bracket.
Donate to charity:
You have until Dec. 31 to make charitable contributions. This year, instead of giving your favorite church or charity cash, gift appreciated stock. You won’t have to pay tax on the capital gains and neither will the charity when they receive your gift. Plus, you’ll receive a charitable deduction on your tax return. It’s a win-win for everyone. We have a client that gifts $600/month to his church. We convinced him to use his highly appreciated McDonald’s stock so he wouldn’t have to pay unnecessary capital gains taxes.
Read: The Best and Surprising Ways To Give To a Charity
