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Tax moves to make before the end of the year

by Suba

Another year is nearly complete.  I hope all of you have a chance to sit back and relax with friends and family this season.  DH and I spend a few days reviewing the past year.  We go over goals, both financial and personal, and see how we have done against what we planned at the same time last year and then make goals for the coming year.  Its surprising how much a few hours of reflection produces in terms of changes or tweaks we need to make as well as making us feel good about areas where we succeeded.  If you do something similar, there may be some last minute strategies that you can look into to reduce you tax burden.

Use retirement accounts.  If you are in a high tax bracket, this is one of the best ways to reduce your tax burden.  If you are in the highest tax bracket, you can save $0.33, in just Federal taxes, on every $ you put into a 401 (k), 403 (b) or IRA.  Some pertinent details: 401(k) limits = $16,500 + $5500 in catchup contribution if you are over 50 this year.  You have until April 16th next year to make a contribution. IRA limits = $5000.  $6000 if you are over 50.  With IRAs though your contributions get curtailed if the modified adjusted gross income for couples filing jointly exceed $90K or exceeds $56K for single filers.

Consider a Roth IRA.  If you are worried about future tax rates, you can contribute money into a Roth IRA.  While you pay tax upfront on the money ou put into a Roth, the growth and future withdrawals are tax free. Limits on contribution are $107K for single filers and 169K for joint.  In addition you can convert all or part of a traditional IRA into a Roth irrespective of income levels.

Charity.  Charitable contributions are limited to 50% of AGI but can be as low as 20% depending on what type of property and organization you give to.  You can also take advatage of donor advised funds.  Since you contribute to the funds right now, you can take a tax deduction immediately.  You can then gradually reasearch which organization you want to give to before making the contribution.  Long term securities can also be contributed and you can deduct the fair market value, potentially eliminating capital gains.

Itemized deductions.  By itemizing deductions instead of taking the standard deduction, you can bunch deductions. Things like charity, elective surgery (if it exceeds 7.5% of AGI) and unreimbursed work expenses can be used.  Also consider delaying payment for freelance work or asking for your year end bonus to be pushed out to next year to lower you tax burden.

529 plan.  This allows you to steadily put aside money for the education of a loved one in a tax advantaged manner. Contribution limits are $13000 per year per beneficiary.

Stock plan strategy.  Before exercising stock options grants this year try to estimate if your marginal tax rat might be lower next year, in which case you should consider waiting until next year to do so.  You may also owe additional federal tax on restricted stock that vested this year, if you are in a high tax bracket.  Usually only 25% Federal taxes are withheld.

Medicare tax on investment income in 2013:  Starting in 2013, 3.8% Medicare tax will be due on the lesser of net investment income or modified adjusted gross income over a threshold of $250K for joint filers and $200K for single filers.  You might want to talk to your tax adviser on how to prepare and minimze the amount you pay on this tax.

Offset gains with losses.  Given the many ups and downs in the stock market, you probably ended up with your share of losses.  You can use these to offset capital gains and upto $3000 in ordinary income.  If you had a really bad year and still have losses left over, you can use it next year.

What are your favorite year end tax moves?
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{ 10 comments… read them below or add one }

Agatha @ Free Money Tips December 14, 2011 at 7:04 am

I tell all my clients that are business owners or freelancers to buy any equipment they need before year end! New computer, camera, hard drive, whatever. The IRS now gives you what is called a Section 179 depreciation deduction, which means you can deduct the full price of that equipment as depreciation in the year you bought it. You can deduct the full amount rather than the old way of deducting depreciation over several years. It’s an awesome way to take advantage of the great holiday deals on equipment AND saves you in taxes!

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Money Beagle December 14, 2011 at 8:16 am

We just did our charitable donations this week. I have to crunch some numbers to see if I should pull ahead the winter tax payment and January’s mortgage payment into 2011. After our recent re-finance, we’re likely on the cusp of losing our ability to itemize year in and year out, so we will definitely be taking advantage of being able to for 2011 if it proves to be the case.

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Jeffrey Trull December 14, 2011 at 11:47 am

I definitely plan to fund my Roth IRA to the limit, although I’m glad I have til April because I haven’t moved the money over yet! That’s probably the only one I really have to worry about (I think?)

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krantcents December 14, 2011 at 11:50 am

I don’t know if it is my favorite, but it helps since I itemize my deduction. I pay both halves of the real estate propertytaxes and prepay January mortgage payment in December.

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Dr. Dean December 14, 2011 at 12:19 pm

You had some good thoughts in this post. We need to sit down and look over our year, financially speaking. We just made our year end charitable donations as we usually do. Since our property taxes went up, again, I’m so glad we prepare for our year-end expenses all year.

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Jeff @ Sustainable Life Blog December 14, 2011 at 1:13 pm

Great suggestions – my year end tax moves will be maxing out my roth IRA and probably that’s it I dont have much to blunt a tax bill I’m pretty sure is coming this year.

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Jon - Free Money Wisdom December 14, 2011 at 2:14 pm

What an ugly word to bring up and we’re not even done with Christmas yet! Ouch. Haha, but a necessary evil nonetheless. Great article and great tips!

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SB @ One Cent At A Time December 14, 2011 at 7:10 pm

I am still offsetting my stock losses of 2008 when WaMu went for bankruptcy. very practical set of advice

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b December 15, 2011 at 7:40 am

“With IRAs though your contributions get curtailed if the modified adjusted gross income for couples filing jointly exceed $90K or exceeds $56K for single filers.”

This is not correct. Contributions are not curtailed based on AGI, only the ability to deduct contributions. This is an important distinction since a high income tax payer may contribute the full $5000 ($6000 if applicable) to a traditional IRA (take no deduction because of income), then have the right to convert that traditional IRA to a Roth IRA, which the high income tax payer wouldn’t otherwise be able to fund because of income limitations.

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Super Frugalette December 18, 2011 at 12:44 am

I am going to hire a freelance to do some work on my blog before the end of the year. This will reduce my income probably enough so that I won’t incur taxes.

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