The holiday season is here, and the new year is quickly approaching. Everyone
knows what that means: it’s tax planning time!
While most people don’t start thinking about their taxes until February or
even April, the best time to make changes is this year. If you haven’t thought
about your taxes since you paid them in the spring, you’re still in good shape.
Let’s look at four areas of tax planning you should aim to tackle as quickly as
you can.
1.) Make any necessary changes to your retirement accounts
If there’s anything that is further off than tax planning, it’s retirement
planning. Still, one of the most compelling reasons for making contributions to
your retirement is preferential tax treatment. For starters, you should be
contributing the maximum to either a Roth or a Traditional IRA.
From there, it gets a little trickier. If your income dropped this year,
say, because you or your spouse lost your job or had a significant reduction in
hours, you might not get much benefit out of the tax deduction that is
presented by a Traditional IRA. You can take this opportunity to switch a
portion of your Traditional IRA to a Roth IRA. Essentially, you’re “paying” the
tax on a portion of your IRA in a year when it won’t cost you as much, then
switching it into a tax-free growth account.
You also need to make sure you’re contributing to your employer’s 401(k)
program. Those contributions are also made pre-tax – so you can deduct your
portion of the matching funds from your tax burden. If you haven’t been
contributing, see if you can make “catch-up” contributions to take advantage of
the preferential tax treatment.
Regardless of how you save, you could be rewarded for it. This year, the
Saver’s Tax Credit, which offers a sliding scale of tax breaks based on your
income and how much you save, has been expanded. Investing in an approved
retirement vehicle like a 401(k) or IRA can let you deduct as much as 50% of
your contribution from your tax bill. How much you can deduct depends on your
income and filing status.
2.) Spend your “use-it-or-lose-it” funds
Many employers offer plans like Flexible Spending Accounts (FSA). These
programs also offer preferential tax treatment, but many of them empty out at plan
year-end whether you’ve used the funds or not. These programs are a great way
to save for unplanned medical problems, but if you were lucky enough to avoid
those costs, you’ll need to spend that money before it goes away.
There are a few ways you can use to spend the money without wasting it.
Obviously, if you’ve been putting off a minor medical procedure (mole removal, eye
exam, new contacts), that’s the easiest way to spend. Otherwise, you may need
to get creative. A few staple goods are FSA eligible. Over-the-counter
painkillers, first aid kits and supplies, and some disaster preparedness
supplies are sometimes eligible for reimbursement. Consider getting first aid
kits as Christmas gifts for young children or donating them to community programs.
Be sure to check with your employer to ensure that your purchases will be
honored by your FSA.
3.) Plan your charitable contributions
If you’re going to donate to a charity, you can give in a way that maximizes
your tax benefit. One of the easiest ways to do that is to give stock.
Not-for-profit organizations don’t have to pay the capital gains tax, so they
can sell it for the full amount. This means you get to take credit for the full
value of the gift. This is also true if you plan to give real property (houses,
buildings, land, etc.) or use another complex giving strategy to maximize the value
of your contribution.
However you give, make sure you keep detailed records about your gifts. You’ll
want both a receipt from the organization and another form of proof, like a copy
of a check or a bank record.
4.) Investigate early tuition payment
You or your child may have a big tuition bill coming in a few months. If you
wait to pay the bill until February or March when it is due, you may miss out
on a chance to cash in on the American Opportunity credit. The plan replaces
the Hope credit and allows for a $2,500 deduction and as much as a $1,000
credit for eligible expenses for four years of undergraduate study. If you are
a student filing for the first time and don’t have much of an income, paying
your Spring tuition now could result in a $1,000 check right around the time
spring break rolls around.
Remember, no one can offer you
accurate tax advice without a careful review of your finances. If you have
questions about filing your taxes, you should speak to a tax planning
professional.
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Services, Inc. is an independent, registered broker/dealer. Member FINRA/SIPC.
Securities and insurance products offered by Cetera: Not FDIC/NCUSIF insured,
may go down in value, not a deposit, not financial institution guaranteed, not
insured by any federal government agency. Registered Address: 1495 E.
Nine Mile Rd., Pensacola, FL 32514. Advisory services may only be offered by Investment
Adviser Representatives in connection with an appropriate Cetera Investment
Advisors, LLC Agreement and disclosure brochure as provided.
