I would like to introduce you to a new holiday – Love and Taxes Day. Intrigued? You should be. This is the day when my husband and I review my taxes, wills, and other long-term financial plans. You are right if you think I named this occasion Love and Taxes Day to make a boring and sometimes painful day seem more romantic, but there is some truth to the name as well. When we review our finances, we also review our charitable giving, retirement savings, college savings, and bequests. In other words, we get to think about who and what we love, and how we can show that love.
Love and Taxes Day doesn’t have to be a set day, but it is best at the end of a tax year when you still have the opportunity to make some changes. This year, we are doing it on December 21. I encourage you to find time for it before December 31 when there is still time to make a few financial moves to minimize your tax liability. Sure, it may be too late to show your love for the environment by installing new energy-efficient windows to take advantage of the residential energy efficiency tax credit, but it isn’t too late to give money to your future, your friends and family, and places you care about.
Here is a list of things to consider as we end this tax year.
Have you given enough to nonprofit organizations this year?
If you itemize your taxes, charitable contributions made to qualifying nonprofit organizations like Berkshire Country Day School may be fully deductible for income tax purposes. Send cash donations by December 31 or make your gift online by December 31. Credit card payments must be processed (but not necessarily paid) by December 31 and checks must be received by the end of the year. Additional tax savings are available for gifts of securities. There are also special tax breaks for individuals 70 ½ or older if they donate directly from their IRA account.
You can make your donation even more valuable, by gifting stocks or securities instead of cash, especially since the market has been at record highs this year. Instead of writing a check for $2,500 to Berkshire Country Day School, you could transfer stock that you purchased for $1,250 but is now worth double that amount to our brokerage account. As long as you’ve held the stock for more than a year, you’re entitled to a full tax deduction of $2,500 and can then avoid having to pay capital gains on the sale of the stock.
Individuals age 70½ can make a tax-free distribution of up to $100,000 from their IRAs directly to a qualifying charity. The IRA-to-charity strategy is particularly helpful for people who have accumulated a lot of money in their IRAs but don’t need the money to live on — and would have to pay a big tax bill when they take their required withdrawals. The charitable transfer lets you give the money to us and count it as a required minimum distribution but avoid taxes on the withdrawal. Not including RMD in adjusted gross income can also help you stay under the income cutoffs for the Medicare Part B and Part D high-income surcharge or taxable Social Security benefits. This tax break is scheduled to expire on Dec. 31, 2013, although Congress has extended it several times in the past.
Do you have any extra clothes or stuff?
We all have extra stuff, and this is a great time to clean out your closets, donate what you don’t need, and realize tax savings. In order to get the tax break, you need to list each item you’re donating and its value. For even more clean-up, consider donating larger items like furniture, artwork, collectibles and jewelry. You will want to get high-end items appraised.
Do you need to update your estate plans?
December is a great time to revisit your estate plans. Sometimes changes to your estate are precipitated by major life events like marriages, divorces, births or deaths, but another good reason to consider changes is because your philanthropic priorities have changes. My husband and I are not able to give as much yearly to organizations we care about like Berkshire Country Day School, but we are able to make planned gifts. This year, we have decided to increase our allocation to BCD because we are so grateful for the education our children are receiving.
Do you need to save more for retirement?
If you haven’t reached your 403(b), 401(k) or traditional IRA contribution limit, consider making a deposit now to either lower your taxable income or to increase your tax deductions. Most 401(k) or 403(b) plans are contributed on a pre-tax basis. If you’re not eligible for a plan at work, you may be able to put up to $5,500 ($6,500 for those 50 and over) tax free into an IRA, depending on your income. Maxing out your contributions is an easy way to bolster your retirement savings while reducing your total taxable income.
Have you reviewed your deductions?
Review your deductions before year-end. You may want to consider paying other deductible expenses before year-end, such as your January mortgage or 2014 real estate taxes. This year, the standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) in 2012. If you are a candidate for the Alternative Minimum Tax, some of those deductions could be disallowed.
Have you spent all of your Flexible Savings Account dollars?
If you medical or child care flexible spending accounts (FSA) are renewed with the calendar year, you need to check your balances. Contributions go into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. This is a great time to buy glasses, contacts, get your teeth cleaned or do whatever you can to use up those funds.
Do you want to give money to an individuals?
In 2013, you can give up to $14,000 to as many individuals as you like without filing a gift-tax return. If you’re married, together you may give $28,000 per recipient. For a double advantage, consider making those gifts to friends and family securities. If your adult children or parents are in the 10% or 15% tax bracket, they qualify for the 0% tax rate on long-term capital gains. When they sell the securities, profit that would have been taxed at a rate as high as 23.8% on your return will be tax-free on theirs. Children under 18 and full-time students under age 24 are subject to be taxed on investment income that exceeds $2,000 at the parent’s higher rate. To qualify for the special rate for capital gains, the securities must have been held for at least 12 months. For securities given as gifts, though, the holding period includes the time you owned them.
There may be other tax moves you can make based on your own specific situation. Consult the internet and your tax and/or financial advisor to learn more. And stay tuned for my next invented holiday.
The information presented in this blog is not intended as tax or legal advice. Please consult your tax and legal professionals before making any big moves.
