By Robert Powell
Take these steps now to avoid a tax hit in 2015:
- Review your estimated taxes. If you’re paying quarterly estimated taxes, now would be a good time to review your payments, especially if you had a big change in income from the prior year, said Paula Nangle, a certified financial planner with Marshall Financial Group in a Doylestown, Pa.Estimated tax includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. What do you need to pay? Either 90 percent of the tax to be shown on your 2014 tax return or 100 percent of the tax shown on your 2013 tax return.If you figure your payments using the regular installment method and later refigure your payments because of an increase in income, you may be charged a penalty for underpayment of estimated tax for the period(s) before you changed your payments. “You’ll want to avoid underwithholding penalties and nasty surprises when you file,” said Nangle.
Take your RMD. Generally, you have to start taking withdrawals — required minimum distributions or RMDs — from your IRA or retirement plan account when you reach age 70½ or if you own an inherited IRA account, said Daniel Galli, a certified financial planner with Daniel J. Galli & Associates in Norwell, Mass. And you have to do that before year-end.
There are exceptions: Roth IRAs, for instance, don’t require withdrawals until after the death of the owner. And if you turned age 70½ in 2014, you have April 1, 2015 to take your RMD. (If you wait, by the way, you’ll have to take two RMDs in 2015.)
If you don’t take your RMD before year-end there’ll be a high tax penalty: a 50 percent tax on the amount you should have taken as well as the ordinary income tax due on the distribution.
Some tricks of the trade?
If you have multiple IRA accounts, calculate your total RMD and then take the RMD from the one that is most beneficial. “For example, this year pull from the accounts that are ‘up’ in value rather than those that have low or negative returns, for example domestic large-cap vs. foreign stocks,” said Galli.
Remember, too, that you can aggregate your IRA accounts, but employer-sponsored retirement plans cannot be aggregated with IRAs. The latter accounts must be treated separately, said Galli.
Another trick: If you’re still working after age 70½ and contributing to your current employer-sponsored 401(k) plan, you don’t have to take an RMD from that account, said Galli. You only have to take RMDs from that plan until the year that you retire.
Consider a Roth conversion. Crunch the numbers to see if a Roth conversion, either with your traditional IRAs and/or within your 401(k), makes financial sense this or next year, said Galli. Questions to ponder: Will federal tax rates be higher or lower in years to come? Will you be in a higher or lower tax bracket in the future vs. today? If tax rates rise and your tax bracket will be higher, converting all or a portion of your IRA/401(k) to a Roth could make sense, said Dustin Obhas, a certified financial planner with CLA Financial Advisors in Chicago, Ill.
Also consider if you have the funds to pay whatever ordinary income taxes will be due. The conversion will be consider a distribution from your IRA or 401(k). That potential downside notwithstanding, converting all or part of IRA/401(k) to a Roth IRA/401(k) gives you two big benefits: tax-free growth and tax-free withdrawals. What’s more, you can recharacterize your Roth IRA back to a traditional IRA by Oct. 15, 2015 if the conversion didn’t make financial or tax sense; if, for instance, the account declined in value or your tax bracket changed, said Obhas.
One other item: Having both traditional IRAs and Roth IRAs give you what experts refer to as tax diversification. In years to come, you’ll have the ability, if you choose, to withdraw money from whichever retirement account provides you with the most after-tax income.
Maximize your retirement contributions. Contribute as much as you can into your 401(k) this and next year, said Obhas. The limit for 401(k) plans this year is $17,500 and $23,000 for those 50 and older. Increase also the amount you’ll defer into your 401(k) for 2015; the limits for 2015 are $18,000 and $24,000 for those 50 and older, said Obhas.
If you can’t reach the max, try to contribute enough to receive your employer’s full match. A typical match is 50 cents on the dollar, up to 6 percent of your contribution. And if that’s not possible, try increasing your contribution by a little bit, even 1 percent if that’s all you can swing. “It can make a big difference come retirement” said Obhas.
Speaking of contributions, don’t forget to contribute, if you’re able, to your traditional and/or Roth IRA and your health savings account (HSA).
If you’re self-employed, Victoria Fillet, a certified financial planner with Blueprint Financial Planning in Hoboken, N.J., recommends setting up and contributing to any number of retirement plan options including a solo 401(k) or a Simplified Employee Pension (SEP) for instance. And while you’re at it, calculate whether you’re saving enough for retirement.
Drain your flexible spending account (FSA). Yes, the U.S. Treasury Department and the Internal Revenue Service (IRS) this year changed the long-standing “use-it-or-lose-it” rule; employers can now offer a carry-over of up to $500 in unused health FSA funds to the following year or to continue a grace period option giving employees a 2½ month extension to spend remaining FSA funds, according to the Society for Human Resource Management. But employers aren’t obligated to offer the carry-over or the grace period option. “Any optometrist, dentist, and the like can help get money spent before year’s end,” Galli joked.
Review realized and unrealized gains and losses. In your non tax-deferred accounts, review realized and unrealized gains and losses and see if gains can be offset by selling some losses, said Galli. According to the IRS, realized capital losses, generally, are first offset against realized capital gains. And any excess losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately) on line 13 of Form 1040.
Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up.One thing to watch out for: Avoid the wash sale rules, said Kelly Olson Pedersen, a certified financial planner with Caissa Wealth Strategies in Bloomington, Minn. According to the IRS, you cannot deduct losses from sales or trades of stock or securities in a wash sale, which occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale buy substantially identical stock or securities; acquire substantially identical stock or securities in a fully taxable trade; acquire a contract or option to buy substantially identical stock or securities or acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. For more information, read the IRS document, Sale of Property.
Consider harvesting your investment gains too. “Our industry loves to discuss the benefits of ‘tax-loss’ harvesting,” said Clemens. “However, many retirees can now control their taxable income, and if they are in the 15 percent marginal tax bracket, then their capital gains tax rate is 0 percent at the federal level. With domestic stock being up the past few years, it’s worth analyzing if gains can be harvested at the 0 percent rate.”
Donate to charity. If you’re looking for ways to cut your 2014 tax bill and do good at the same time, consider donating to a charity or a donor-advised fund. Of course, if you want to claim these donations for a tax deduction, you must itemize your deductions rather than taking the standard deduction, said Obhas.Besides giving cash to a charity, consider donating highly appreciated stock. “You won’t owe capital gains taxes and can deduct the current value of the investment as a charitable gift,” said Obhas. Obhas recommends using the IRS’ Exempt Organizations Select Check tool to make sure you’re donating to a qualified charity.
Bunch deductions. You can cut this year’s tax bill by bunching your itemized deductions, especially medical ones, said Clemens. “Those 65 and older still have a 7.5 percent of adjusted gross income (AGI) threshold through 2015 to deduct out-of-pocket medical expenses,” he said. In addition to meeting the threshold, medical expenses must also be paid this year; however, using a credit card counts, Clemens said. “If one thinks they might meet the threshold, they may want to consider year-end medical purchases they may have been delaying,” he said.
One helpful hint: Mileage primarily for medical care counts. “Those trips to the doctor and pharmacy can add up,” said Clemens.Also, if you’re self-employed and having a good year, Fillet recommends making deductible purchases and payments now for next year.
Review Medicare and Social Security benefits. Review your Medicare, supplemental and prescription drug plans, and especially the latter if you have changed medication, said Fillet. And Obhas recommends reviewing your Social Security benefits statement, which can be found at my Social Security.
Also, figure out when you (and your spouse) should take your benefits, said Obhas. The earliest is at age 62, the latest is age 70. After 70, your benefits no longer increase.Your Full Retirement Age depends on the year you were born; your statement will tell you when it is. “Taking your benefit before your Full Retirement Age can limit Social Security strategies available to you and your spouse,” said Obhas. “Strategies such as spousal benefit, file and suspend, and the like should be examined.”
If you’re divorced and had been married for 10 years or more, look into the Social Security benefits available to you. One strategy, according to Obhas, is this: “You could delay taking your own benefit by taking your ex-spouse’s benefit, which is one-half of their retirement benefit. Certain restrictions apply: you must be married for 10 years or longer, you must not be currently married, and you must be age 62 or older.”
Reduce your estate tax bill by gifting. For those with a big estate, Obhas said gifting can help reduce a potential estate tax bill. The federal estate tax exemption — the amount you can leave to heirs without having to pay federal estate tax — is $5.34 million for 2014 and $5.43 million in 2015.
For those fortunate enough to worry about going over the exemption, here are some ways to help, said Obhas:First, the annual exclusion gift. You can give a $14,000 gift to each individual.
Next, consider paying someone’s college tuition or medical bills. Of note: “Paying directly to the provider is the only way to do this,” said Obhas. “Doing this will reduce your estate and does not count against your annual exclusion gift. Not to mention you could really make someone’s day by helping to pay their college or medical costs.” Pedersen recommends contributing to a 529 plan to fund your children’s and/or grandchildren’s college education. One way to do this? Use your annual gift exclusion of $14,000.
Remember the basics. The end of the year also is a good time to review your yearly budget and make sure you’re on track and not overspending, said Fillet. Also, check your emergency fund. And don’t forget to review your estate documents. Did anything in your life change? If so (and even if not), look over your wills, trusts and beneficiary designations, and make any necessary changes, said Obhas.“The most common oversight I see with prospective clients is when they have children from a previous marriage and have remarried and started a new family,” he said. “Their documents haven’t been updated to reflect their wifi password hacker for pccurrent marriage and leave most of the assets and decision making at death to the ex-spouse while leaving out the current spouse and children. Which needless to say, can be very problematic.”
Robert Powell is editor of Retirement Weekly, published by MarketWatch. Follow his tweets at RJPIII. Got questions about retirement? Get answers. Send Bob an email here.
Original Article: http://www.nextavenue.org/article/2014-12/11-money-moves-make-year-end
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