As 2013 draws to a close, there's a bit of time to act before it's too late. There are a number of moves to consider making before the year is over.
You might have gains on stocks that were sold in non-retirement accounts. These gains can be offset with a sale of stock that you hold that are below your purchase price. You are able to take losses up to $3000 more than your gains and offset ordinary income with this loss. If your trading has netted you a loss for the year, any amount over $3000 is carried forward, and will offset any gains or a maximum $3000 of income until used up.
Year end is a good time to review your portfolio and decide whether your current allocation is in line with your long term goals. Of course, you can review your holdings year round, but it's a good idea to commit to review your asset allocation at least once per year.
The Qualified Charitable Distribution
This provision in the tax code permits someone who is taking Required Minimum Distributions from their IRA to direct withdrawals directly to a charity. It will count against the RMD requirement, but not as a tax deduction. There are a number of potential benefits to this strategy. For those who are charitable, but do not have high enough deductions to itemize, this has the same effect as having the donation be a deduction. Perhaps a much larger factor is for those who are receiving Social Security benefits and find that IRA withdrawals are pushing their social security to a level where 85% of the benefit is taxed. This bit of tax code is set to expire at the end of 2013, and congress hasn't hinted whether or not it will be extended.
Standard Deduction vs Itemizing
In 2013, the standard deduction is $6,100 for a Single filer and $12,200 if Married filing joint. For those who are on the very edge of being able to itemize, a simple strategy might help. In odd years, make your January mortgage payment, and first quarter property tax payment. In even years, you'll make one less payment for both these bills. The same strategy for charitable contributions. In the odd years, send in your years' donations in January, and then in December, send in the donations you intend for the next year. Many charities are not on a calendar fiscal year, and to them, you are just another annual donor. This strategy should help you itemize every other year, and then just claim the standard deduction in the remaining years. Note - Medical expenses have their own 10% AGI threshhold (7.5% for those 65 and older) and a bit of planning can help pull these expenses into the same year you'll itemize, else the deduction will be lost.
The Flexible Spending Account
Many employers offer, with the IRS' blessing, a Flexible Spending Account. This account permits the employee to put aside up to $2500 to be used for medical expenses that were not reimbursed by insurance. The great feature of this plan is that the money comes right off the top of your income, no Federal, State, and no FICA is withheld. It can be spent on a number of items including doctor co-pays, deductibles, prescription costs, and more. The downside is this provision is "use it or lose it." The law just changed to permit employees to carry over up to $500 of unspent money into the next year, although most companies haven't yet added this to their plan. Check your account balance, and if any remains, first confirm with your benefits department when your deadline is. Grab a copy of the approved expense list and don't let that money get forfeited.
Health Savings Account
Similar to the FSA in that pretax money can be used to pay for unreimbursed medical expenses, the HSA is a remarkable benefit. The limit you can deposit in 2013 is $6,450 for a family, $3,250 if you are single. In contrast to the FSA, the money is not forfeit each year. To the contrary, you're permitted to invest in long term, similar to an IRA or other brokerage account. It's not available to anyone, you must have a high deductible health plan to qualify. If you have this type of health plan, the HSA may be the right reimbursement account for you and your family.
The Roth IRA Conversion
Owners of IRAs are permitted to convert funds from their traditional IRA to a Roth. This will likely come with a tax bill to the extent that any of the assets were pretax or in proportion for pretax/post tax assets if you had any non-deducted deposits. You are able to convert any or all of your IRA to Roth by the end of the year, and have until tax time, April 15th or October 15th if you file an extension, to recharacterize any or all of that conversion. This is one of those rare financial do-overs that can help you fine tune your tax liability for the current year. The most compelling reason to convert is to top off your current bracket. You are in the 15% marginal tax bracket and are $10,000 from hitting 25%. You can make the conversion now, and when doing your taxes for 2013, reverse any amount that put you just over. If the funds were in the form of a mutual fund, and the value drops between the time you convert and tax time, you can recharacterize instead of paying the tax on the higher, conversion value. If you are not comfortable doing this on your own, check with your advisor, he'll explain the process in full detail. (Note, if you have a 401(k), your employer might permit a conversion to a Roth 401(k), but there's no ability to recharacterize, so caution is suggested.)
Wills & Estate Planning
Year end is a good time to review beneficiary designations on all of your accounts, including life insurance and retirement accounts. Be aware, for retirement accounts such as 401(k)s and IRAs, each account should have a designated beneficiary and not pass through your will. Retirement accounts that pass through a will don't have the same flexibility for distributions as those that pass through account beneficiary designation. You should take the time each year to review these beneficiaries, especially if you've had a divorce or death in the family. Many spouses encounter an unpleasant surprise when they find a retirement account or life insurance policy of their deceased spouse had a former spouse still listed as the beneficiary.