Roth conversion: There are a few benefits to having a Roth as opposed to an IRA. So long as you are at least 59 ½ and the converted account has been open for a minimum of five years, any withdrawals are tax and penalty free with a Roth. However, keep in mind that you must pay taxes on any pretax contributions/earnings in the regular IRA for the year of conversion. Another good thing about the Roth is that you have some time to change back to an IRA if you so desire.
Portfolio review: Don’t allow your taxes to determine your investment strategy. However, if you are thinking about selling appreciated securities or other investments, selling before the end of the year could save you some money. You’ll pay 0% on long-term capital gains if you are in the 15% bracket. As of 2014, you would qualify for the 0% capital gains rate if your taxable income is $36,900 or less if you’re single, or $73,800 or under if you are filing jointly and are married.
Add to your 401(K): Any funds which you add to your 401(K) or a comparable retirement fund (but not a Roth) isn’t included in your income, which lowers your tax bill. If you receive a Christmas or some other kind of annual bonus, put it in your 401(K).
Give a cash gift to a loved one or friend: You can donate up to $14,000 to as many people as you want before Dec. 31 without filing a gift-tax return. If you are married, you and your wife/husband can give up to $28,000 per recipient.
Plan out itemized deductions: If you are anticipating a reduction in income for next year (perhaps due to retirement), deductions will most likely be of greater value this year. It would behoove you to pay deductible expenses before the end of the year. Examples are the mortgage due in January, real estate taxes, and fourth quarter estimated state income taxes. Use caution- if you are eligible for the Alternative min. tax, some of those deductions might be not allowed. If you are unsure, please contact us at Rozier with any pertinent questions which you might have.
Make a charitable donation: this time of year is a great time to clean out your closets, garage, etc. If you choose to donate to the Salvation Army or any other charity, you can write the donations off as a tax deduction provided that you itemize deductions. If you donate a vehicle which is worth greater than $500 to charity, the actual deduction amount depends on what that charity receives when selling that vehicle. Keep good records of your donations, because The IRS has experienced abuse in the past with people taking advantage of tax deductions. Retain canceled checks and receipts to prove your donations.
Avoid purchasing mutual funds towards the end of the year: There are some funds which pay out dividends and accumulated capital gains in the month of December. It may be tempting to purchase right before that day so that you may obtain a year’s worth of income. This is not the way it works. If you were to do that (buy funds in this manner), you would only get back a refund of the same amount of your investment. If you intend to buy shares in a non-retirement account at the end of the year, make sure to check the fund company’s site to find out when dividends will be paid.
Tax refund reduction (thus ensuring it): Most Americans depend on their tax refund money. More than ¾ of Americans give the government an interest free loan every year, with a mean refund of $3000. Divide that into 12 months, and it equals $250 per month. Why not get your money now right after having earned it? Unfortunately, identity theft is increasing in our society, and some people have their refunds stolen. All you need to do is file a revised W-4 with your employer. If you want to reduce your withheld taxes, the more allowances you claim, the better.