(originally written by Deborah L. Jacobs)
Many people, rushing to make holiday plans, would like to take a vacation from thinking about money. Not so fast. In the process you could whiz by some crucial financial deadlines on Dec. 31. Miss them and you might get hit with substantial penalties or lose the opportunity to take advantage of some smart money-saving moves. Here are strategies to consider in the countdown to 2014.
1. Fund employer-sponsored retirement plans. For 2013, you can contribute up to $17,500 to a 401(k) plan, or $23,000 if you’re 50 or older. These dollars can be put in a pretax 401(k), cutting your current tax bill. Or if your employer offers the option and you believe tax rates will rise, put some of those dollars in a Roth 401(k). The money goes into a Roth after taxes, saving you nothing now. But the Roth grows tax free. You can withdraw from it tax free when you retire or before that if you leave the company, have had the account for at least five years and are 59 ½ or older.
Think it’s too late to top up your 2013 contributions? Maybe not. Ask your employer to withhold extra dollars from your last couple of paychecks.
Self-employed? Set up a one-person 401(k). So long as you create it by Dec. 31 you can make contributions for 2013 until the due date of your 1040 with extensions – as late as Oct. 15, 2014.
2. Buy business equipment. Here’s another tax goodie if you’re a business owner or moonlighter. Instead of recovering the cost of new equipment by depreciating it over a period of years, you’re allowed to deduct the entire cost of most new business property in the year you acquire it. Currently, the limit is a generous $500,000, which comes in handy if you’re in the market for computer equipment, furniture, or a car, for example, but it’s scheduled to drop to $25,000 Jan. 1. For the current rules on this Section 179 Deduction, check IRS Publication 946, which downloads here as a PDF.
3. Accelerate income tax deductions. The most obvious examples are property taxes and state and local income tax. That’s assuming, however, you’re not paying (or in danger of paying) the fiendishly complicated alternative minimum tax, which can turn that traditional advice on its head. For example, since state and local taxes aren’t deductible in AMT, you might delay the payment of your fourth-quarter state taxes until 2014 – if you’re stuck in AMT this year but likely won’t be for 2014.
4. Take required distributions from your own IRA. You are considered the owner of an IRA that you set up and funded – either through annual contributions or the rollover of a 401(k). Unless the account is a Roth, you must take yearly minimum distributions starting at age 70 ½. You have until April 1 of the year after you turn 70 ½ to take the first one. After that, you must take distributions by Dec. 31 of each year.
The payout is based on the account balance on Dec. 31 of the previous year divided by your expectancy, as listed in one of three different IRS tables (really) contained in Appendix C of IRS Publication 590, “Individual Retirement Arrangements (IRAs),” downloadable as a PDF here. After doing the calculation the mandatory withdrawal is expressed as a dollar value. You are required to pay income tax on this amount.
5. Take required distributions from an inherited IRA. Generally, non-spousal IRA heirs must withdraw a minimum amount each year, starting by Dec. 31 of the year after the IRA owner died. Note: This is true whether it’s a traditional IRA or a Roth (a common misconception).
To calculate this distribution, you take the balance on Dec. 31 of the previous year and divide it by the individual’s life expectancy, as listed in the IRS’ “Single Life Expectancy” table (see p. 88 of IRS Publication 590. Unless the account is a Roth, there is income tax on this required payout.
Don’t make the mistake, as some people do, of using the number from the table to figure a percentage. In subsequent years, you simply take the number you used in the first year and reduce it by one before doing the division.
6. Split inherited IRAs that have more than one beneficiary. Co-beneficiaries must take distributions over the life expectancy of the oldest beneficiary. It’s better to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer payout period for the younger heirs. But you must take this step before Dec. 31 of the year following the year of the IRA owner’s death. If you don’t, the payout schedule will continue to be based on the life expectancy of the oldest beneficiary.
7. Make yearly tax-free gifts. You can give anyone (and everyone) $14,000 annually without eating into your lifetime exemption from gift or estate tax. (That exemption is currently $5.25 million and goes up to $5.34 million in 2014.) Couples can combine this annual exclusion to jointly give $28,000. Just make sure 2013 gifts are complete (received and, in the case of a check, either deposited or cashed) by Dec. 31.
8. Fund 529 state college savings plans. A popular use of the annual exclusion is to fund these plans. The main appeal of a 529 is income tax savings: You put money in one of these plans and you don’t have to pay federal or state income tax on the earnings, provided the cash is withdrawn to pay for college or graduate school tuition, fees, room and board, or books. In some cases you also get a state income tax deduction for your contribution. To take advantage of that tax break your contribution checks must be postmarked by Dec. 31; if you contribute by electronic bank transfer, your online request must be submitted before 11:59 p.m. on Dec. 31.
When it comes to 529s, there’s a special twist with annual exclusion gifts: You can make a lump-sum deposit of as much as $70,000 ($140,000 for a couple) and treat it as five years’ worth of annual $14,000 gifts. To do this you must file a gift tax return, and if you die before the five years is up a pro rata part of the gift goes back into your estate. Still, it’s a good way to get a large lump of college money into a 529, where it can grow tax free.
9. Harvest capital gains and losses. A popular way to reduce the tax on investment gains is to take capital losses to offset them. Should you go this route, beware of the “wash-sale” rule of the Internal Revenue Code. It prohibits deduction of losses if you either buy back the property you just sold or buy “substantially identical” securities 30 days before or after the trade. If you violate the rule, you can’t deduct the loss until you sell the new shares.
10. Pay estimated taxes. This is relevant to people who are self-employed, have a business on the side, or have taxable investment income. To avoid underpayment penalties for the 2013 tax year, you must prepay on a quarterly basis 100% of what you owed in 2012 or 110% if your adjusted gross income in 2012 was more than $150,000.
11. Make charitable donations. Publicly traded appreciated securities – assuming you have any – are by far the most tax-efficient asset to donate to charity. You can deduct their full fair market value at the time of your gift (offsetting up to 30% of your AGI), yet you don’t have to recognize the appreciation as income. If you want a 2013 deduction but don’t yet have a charitable recipient in mind, transfer those securities to a donor-advised fund. You can claim your deduction now, then recommend grants to your favorite causes later. (Fidelity, Vanguard and Schwab all have affiliated charitable funds.)
If you’re 70 ½ or older and still need to take a 2013 required minimum distribution from your IRA, consider transferring the payout (or part of it) directly to your favorite charity (it can’t be a donor advised fund). You won’t get a charitable deduction, but you also won’t have to recognize this “charitable rollover” as income, which has other benefits. For example, it might hold down the amount of extra income-based Medicare premiums you must pay in 2013.
Even if you’ve already taken your RMD, you can do a charitable rollover for up to $100,000 – before Dec. 31. This provision expires at the end of 2013. For details about how to do this, and pitfalls to avoid, see “The Dollars And Sense Of Giving IRA Assets To Charity.”
12. Schedule checkups and stock up on meds. All the more so if you have met your deductible for 2013. In that case prescription refills that cost you nothing now may add up to considerably more starting Jan. 1 until you have met your deductible for 2014. Likewise, if you need surgery and have a choice about whether to schedule it this year or early next year, you might be better off financially having the operation this year.
A similar strategy applies if you have incurred enough unreimbursed medical expenses this year for them to be deductible on your federal income tax return. Medical expenses are generally deductible if they exceed 10% of your adjusted gross income – 7.5% if you or your spouse is 65 or older.