It’s that time of the year: holiday parties, mistletoe, a bit too much eggnog — a combination that’s enough to cause trouble for anyone (… or maybe just me?).
In any case, between the yuletide and New Year’s resolutions, the end of the year is a prime time to take inventory of your finances…
And the best place to start is with your tax return.
You could be giving up far more money than necessary to the giant suck-hole that is the U.S. government. If you are a Crow’s Nest reader, you know damn well we give the IRS no quarter.
Do yourself a favor and take advantage of tax-saving strategies. There are a number of different areas you need to look at — including retirement savings, investment income, itemized deductions, home improvements, and health savings accounts.
Of course, this is just a small list, and you really do want to make sure your refund is as large as possible, right? At the very least, you want the government to get less of your hard-earned money.
So make sure you do at least these things…
Maximizing Your Write-Offs
When it comes to getting the most from your taxes, one of the first things you need to do is practice due diligence on possible deductions.
Most experts seem to advise looking into deferring your income until the following year (or possibly later). This could mean something like delaying a big bonus at work, an extra-special commission, or just any decently-sized chunk of money that you could convince an employer to pay you in the coming year rather than now.
Max Out Retirement Plans
Contributions made to Roth IRAs are on an after-tax basis, but all the income made in the account can grow tax-free, subject to certain very easy to satisfy requirements.
If you have extra cash, the best thing to do is to max out your Roth IRA. You can contribute $5,500 per year tax-free (or $6,500 if you are over 50).
If you have a health savings account (HSA), you can max that out as well. Keep in mind you do not have to use the funds for health care needs; you can actually invest the money within the HSA for your retirement.
Jorie Pitt, an associate financial planner at AHC Advisors, told MarketWatch:
You get a tax deduction for your contribution and you get tax-deferred or taxfree growth on the contribution and the investment earnings depending on the future use of the money. If you use the HSA assets to pay for qualified healthcare costs now or in the future the contribution and the earnings are withdrawn tax-free. If, after the age of 65, you use the HSA assets for non-health care costs then the contribution and the earnings were tax-deferred and the money will be taxed upon withdrawal from the HSA.
The limit for HSA contributions is $3,250 for individuals and $6,450 for families.
Itemized Deductions
The next thing to consider is possible itemized deductions. Two great areas to start with here are home mortgage interest and property taxes.
Not only do homeowners get to include their property taxes along with their mortgage interest as a write-off, but you can also deduct interest on debt that was incurred to buy, build, or substantially improve your principal residence and one other personal residence.
Take advantage of these deductions if at all possible. You may want to consider kick-starting that end-of-the-year home improvement project.
Tax Selling
All of us have at least one or two stinkers sitting in our stock portfolio. The end of the year is the time to put those losers to work…
A quick caveat: If you plan on selling losing stocks for tax purposes, I recommend speaking with your accountant or financial advisor to find out the best approach. Simply put, when you sell stocks for a gain, you are taxed on that as “a capital gain.” However, if you sell for a loss you can claim that loss on your taxes as a “capital loss” to offset whatever gains you may have.
It also helps to have held the stock for a full year to lower your tax-liability.
Now, I am not an accountant, so I seriously recommend you have this discussion with them before making such moves.
The area is full of possibilities. You could take some of the stock or even fund shares and donate those to charity in order to bump up another deduction on your return. This works great if the shares have increased in value, since you also avoid paying tax on their appreciation.
If the stock has been at a loss (maybe an even better reason to consider donating), sell the stock first so that you can claim the loss as a deduction and then make your charitable donation… You’ll get two deductions at once.
Those of you who are aged 701⁄2 can make cash donations directly from your IRA to qualified charities. These can be up to $100,000 in total, and they are completely federal income tax-free. They do not get reported as charitable write-offs on your tax forms, although they will still definitely help your tax profile and allow you to keep more of your money. Be sure to check with a professional on this one, since there are some unique
requirements.
So, if you have truly given up on a stock, put that loser to work to reduce your end of year tax burden…
Planning for Your Future
They don’t call them new year’s resolutions for nothing…
It’s the perfect time to reflect on the year past, and make sure that you put your best foot forward starting January 1.
Of course, each person and each family will be slightly different. You may have had some major life-changing events in the past year, like buying or selling a home, getting married, or even going through a divorce. All of these things can have impacts on your taxes, so you should take the time now to consider how to work around all of them and get the maximum return.
I know that this isn’t sexy advice… but the mark of a successful person is learning from your mistakes, and adjusting your life to put yourself in the best position to succeed.
As Benjamin Franklin said: “Be at war with your vices, at peace with your neighbors, and let every new year find you a better man.”
Happy Holidays from Outsider Club and The Crow’s Nest!
