If you haven't yet prepared a year-end financial 'to-do list,' don't sweat it. You still have time. By making a few thoughtful, well-timed financial moves before December 31, you could rack up significant savings. Here we look at certain actions you can take to ensure that you don't end up losing money, or leaving financial advantages on the table.
TUTORIAL: Personal Income Tax Guide
Why Review Now?
Many of us will experience events throughout the year that might require us to go back and review our current financial plans. Life changing events such as marriage, divorce, new additions to the family, job loss, retirement and death are all perfect examples of situations that will likely require revision, or even radical revamping, of your current plan. When it comes to financial, insurance, estate and tax issues, many of us are procrastinators. However, if you make it a goal to complete a simple year-end checklist, you could save yourself money and time, and gain the piece of mind that comes from knowing your family is well taken care of.
Reducing Your Taxes
First things first. The itemized deduction can be a huge tax saver. If you own a home, you're well aware of the deduction that's allowed for mortgage interest. But did you know that the interest on your home equity loan might also be deductible? (For further reading, see Understanding Your Mortgage and The Home-Equity Loan: What It Is And How It Works.)
If you've been jamming your receipts into a shoe box all year long, now would be a good time to sort through them, and organize them according to categories such as job-related expenses, education or job-hunting expenses and charitable contributions, just to name a few. If you're self-employed or own a small business, now might be the time to invest more money into your work by purchasing a new computer system, office furniture or a work vehicle. All of these items can be granted quite an attractive deduction come tax time.
Sales Tax Deductions
If you live in a state that has a sales tax but no state income tax, such as Florida, Nevada or Wyoming, you may deduct the actual amount of sales tax that you paid for the year instead of deducting state income taxes paid, as a resident of a state that imposes income tax typically would. The American Jobs Creation Act of 2004 gives taxpayers in these particular states, that have no state income tax, the option to claim state and local sales taxes paid when they itemize deductions. If you haven't saved all of your receipts for the year, you can use an IRS estimation chart to help you determine the amount of deductions you qualify for.
Therefore, if you bought a big-ticket item such as a vehicle, boat or big-screen TV, and you live in one of these states covered in the American Jobs Creation Act of 2004, you should save the receipts for your accountant so he or she can get you the deduction. Bear in mind, this option was available for 2004 and 2005 federal returns only.
Let's say the stock market was good to you this year, and you have some capital gains from your investments that are going to be exposed to taxes. A prudent year-end plan should include taking the time to sort through your accounts, and using a strategy known as tax-loss harvesting. This technique involves selling the losers in your portfolio to offset any realized gains. (To learn more, see Selling Losing Securities For A Tax Advantage.) If you wait 30 days and obey the requirements of the wash-sale rule, you can then buy back the securities, if you wish.
Don't be afraid to generate large capital losses, because there is no limit to the amount that can be offset against capital gains. You can claim an additional $3,000 loss on your federal taxes, and then carry forward the remaining loss into future tax years.
Giving to Others
If you have children or grandchildren, you may (depending on the state in which you live in) also receive a state tax deduction for your contributions to a 529 college savings plan. And, let's not forget that your charitable contributions are usually, partially, tax deductible. When you give to a charity, make sure that you get a receipt that you can use come tax time. (To learn more, see Choosing The Right Type Of 529 Plan and Investing In Your Child's Education.)
If you're computer savvy, consider buying a tax software program such as TurboTax or TaxCut to play around with, just so you can see the various deductions allowed, and the potential savings available. (To learn more, see Tax Tips For The Individual Investor.)
Getting Your Estate In Order
A key part of estate planning, that many of us overlook, is the matter of beneficiary designations. From time to time, it is a good idea to verify that these designations are still as you would like them to be. (For more information, see Who Is The Beneficiary Of Your Account?) At a minimum, your estate-planning checklist should include reviewing the beneficiary designations for your IRA accounts and life insurance policies, and checking the validity of your will.
You may also want to look into adding a "transfer-on-death" (TOD) feature to taxable accounts, in order to have them avoid probate in the event of your death. (See Skipping Out On Probate Costs.) While you have these documents out, it would be a good idea to check that your current life insurance coverage is adequate for your present circumstances. Are you underinsured? Are you over-insured? (To learn more, see Buying Life Insurance: Term Versus Permanent.) If you are attempting to reduce the value of your estate, for estate-tax planning purposes, consider using your annual $13,000 tax-free gift per person in 2011. (For further reading, see Getting Started On Your Estate Plan.)
Other Overlooked Areas
As the year goes by, it's not uncommon to forget to make your retirement plan contributions, or fail to set aside enough money to maximize the contribution. Since the maximum contribution limits have changed over the past couple of years, and will continue to change in the upcoming years, you'll want to check with your financial planner to make sure that you are contributing the correct amounts. If you recently turned 50, you should be eligible for a larger contribution amount, known as a "catch-up" contribution. Also, if you are age 70.5 or older, you need to make sure that you've taken your required minimum distributions (RMD) from your tax-deferred retirement plans, such as IRAs and 401(k)s. The deadline to sign up for Medicare Part D (prescription drug coverage) is approaching fast, so make sure you meet the filing deadlines if you want to obtain coverage.
Finally, depending on your credit history, you might want to check your credit rating and credit report by going to a reputable online site such as myFICO, which offers you your FICO score, plus credit reports from all three credit bureaus, for a fee.
Along with making a year-end financial 'to-do list,' to help you stay on top of the matters discussed here, you should also take some time to prepare your new household budget for the year ahead. Once you have a system in place, the process will become easier every year. Although, you may find it hard to get motivated to tackle some of these tasks, especially during the holiday season, the potential tax savings and other benefits we've looked at could be history once December 31 has come and gone. So put down that eggnog, roll up your sleeves and get to work - you'll be glad you did!