Procrastinators' Tax Checklist: 10 Money Saving Moves to Make by Dec. 31
By Janet Novack
Let’s face it. Most of us put off tax chores from time to time---not as chronically or recklessly as Congress, but often enough that it can end up costing us. So as a service to the frazzled, here are 10 money saving moves that must be made before Dec. 31 and five others that can be safely postponed until the beginning of next year.
BY DEC. 31:
1. Grab expiring tax breaks. Dozens of tax breaks expire on Dec. 31, and while Congress is likely to reauthorize some of them retroactively, others could permanently disappear. So, for example, if you’re self employed or own a small business and are in the market for a new vehicle, consider buying before Dec. 31. Until then you can write off the full cost of purchasing a new luxury SUV—provided it’s used 100% for business and its gross vehicle weight is more than 6,000 pounds. (More details here.) If you’re considering making energy efficient home improvements, get the work done before Dec. 31 to take advantage of an expiring $500 tax credit. (More on this green credit here.) What about the expiring payroll tax cut you’ve heard so much about? Unless you run the payroll department of a business, there’s nothing you need to do about it.
2. Check the terms of your medical FSA. With a medical flexible savings account, money is deducted from your salary before tax and put in an account to pay medical, dental and vision expenses not otherwise covered by insurance. The catch is, by law, any money you don’t spend in the year it’s saved is forfeited. Back in 2005, the IRS ruled that employers can give workers an extra 10 weeks---meaning until March 15th of 2012 if a plan is on a calendar year, as most are---to use up their cash. But not all employers allow this grace period. So check your plan terms and FSA balance immediately---you might need to order those new contact lenses or go to the chiropractor before Dec. 31. (For surprising ways to use up your FSA dollars, including driving to Wal-Mart to pick up a prescription, click here.)
3. Get charitable checks in the mail or donate online. To claim a deduction for a 2011 charitable contribution, you must mail your check by Dec. 31. You don’t have to worry about the check actually clearing before the end of the year, but play it safe and put it in the mail before the 31st. Any donations you charge to your credit card by Dec. 31 are also deductible for 2011, even if you don’t pay your credit card bill until next year. You’ll find 12 tips for yearend charitable giving from Kelly Phillips Erb, a.k.a. Taxgirl, here . If you would like a deduction for 2011 and aren’t sure yet what charity you want to benefit, Ashlea Ebeling explains here the appeal of a donor advised fund. By contributing to one of these funds, you can claim a deduction for 2011 and then dribble out the money to specific charities when you’re ready. For help picking a worthy charity, Forbes rates the 200 largest here.
4. Accelerate other deductions into 2011. Consider making your Jan. 1, 2012 mortgage payment, or paying state and local tax bills due in January, before the end of 2011. That will give you the tax savings from those itemized deductions a year earlier. Warning: If you are subject to the alternative minimum tax or expect to have a much higher income in 2012 than you had for 2011, accelerating deductions can backfire---so check with a tax pro if you think you might be in that situation.
5. Harvest capital losses if you have them. Sell losing positions in your taxable (meaning non-retirement accounts) to offset any taxable capital gains you’ve realized during the year. Didn’t take any gains this year? Watch out, your mutual fund may have taken them for you; taxable gains get passed on from funds, even if you’ve sold no shares. Anyway, up to $3,000 a year in net capital losses can be used to offset ordinary income (say from your salary), and the rest of any excess losses you harvest can be banked to offset gains in future years. Forbes Investment Strategies columnist William Baldwin explains the basics of capital gains here and how to harvest losses without risking missing out on a market move or running afoul of the “wash-sale” rule here.
6. Make annual gifts to family and friends. You can give $13,000 a year to as many people as you want without it counting against the amount you can give during your life without having to pay gift tax. That lifetime gift tax exemption is currently $5 million, but is scheduled fall to $1 million in 2013. The annual exclusion is a use it or lose it proposition---if you don’t use the 2011 exclusion by Dec. 31, you can’t bank it. (Deborah Jacobs has more advice on tax smart ways to give to family and friends here.)
7. Contribute to a 529 state college savings plan. Thirty-seven states permit you to claim an income tax deduction (anywhere from $500 to Pennsylvania’s generous $13,000 per beneficiary) for contributing to a 529 state college savings plan. But to get the tax break for 2011, you must contribute before the end of the year. You can find an up-to-date list of breaks here at Savingforcollege.com. This isn’t just for people saving for their kids’ or grandkids’ educations. If you’re planning to go to graduate school, you can contribute to a 529 for yourself. In fact, Ashlea Ebeling explains here that you can contribute in December, bank your tax break, and then use the money in the 529 for graduate classes in 2013. (Of the states that give tax breaks, only Indiana has a 12 month holding period before you can use a contribution.)
8. If you’re self-employed, set up a one-person 401(k) . So long as you set up a one-person 401(k) by Dec. 31, you can make contributions for 2011 until the due date of your 2011 return with extensions—as late as Oct. 15, 2012, if you operate as an unincorporated sole-proprietor attaching a Schedule C to your individual tax return. Mutual fund companies, including Fidelity, the Vanguard Group and T. Rowe Price offer easy-to-setup one-person 401(k)s, as do Charles Schwab , Merrill Lynch and Edward Jones. More on the benefits of a solo 401(k) is here.
9. If you’re an employee, max out your 401(k). If you have an accommodating payroll department and haven’t yet contributed the maximum allowed to a 401(k) for 2011, you might still be able to get money withheld from that last paycheck of the year. For 2011 you can contribute up to $16,500, or $22,000 if you’re 50 or older, to a pre-tax 401(k), a Roth 401(k) or a combination of the two. Contributions to a Roth won’t save you any 2011 tax, but the money in a Roth grows tax free and you can be withdrawn from the account tax free when you retire or before that if you leave the company, have had the account for at least five years and are 59 1/2 or older.
1o. Take required minimum distributions from IRAs. If you’re over 70 ½ or have inherited an IRA from someone other than a spouse, you must take an annual required minimum distribution from your IRA by Dec. 31. (If you just turned 70 ½ this year, your first RMD can wait until as late as April 1 2012. That’s April 1, not April 15th.) Your RMD for 2011 is based on the balance in your IRA as of Dec. 31, 2010 and your age, in some cases your spouse’s age, and whether the account is your own or an inherited one. (There are three different tables in the appendices of IRS Publication 590 for calculating the percentages of your balance you must withdraw.) Note that while you don’t have to take an RMD from your own Roth IRA, if you have inherited a Roth from someone other than a spouse, you must take RMDs.
Whew! Well, at least these five items can wait until after January 1st.
1. Fund an IRA for 2011. You have until April 17th 2012 (the due date for 2011 tax returns) to make a contribution to a traditional or Roth IRA. Note that the April date holds even if you get an extension to file your taxes. Those with earned income can contribute up to $5,000 a year ($6,000 if they’re 50 or older) to a traditional or Roth IRA, or a combination of the two. There are, however, income restrictions on who can open a deductible IRA or contribute to a Roth. (Details here.) If your teenage children had earned income in 2012, consider opening a Roth IRA for them. (More on this and other ways to turn your kids into millionaires here. )
2. If you’re self-employed or moonlighting, open a SEP IRA. A 401(k) isn't the best option for everyone with self-employment income. For example, if you are moonlighting and have a regular job with a 401(k), a SEP IRA is a better choice. That’s because one annual limit for contributions to a 401(k) applies to all your 401(k) accounts, combined. That means you might be able to save more in a SEP IRA. Even better, you have until the due date of your 2011 returns, with extensions—meaning until Oct. 15th 2012---to set up and fund a SEP IRA for 2011. For more on the best retirement plans for the self-employed, see Kerry Hannon’s rundown here.
3. Pay fourth quarter estimated taxes. If you’re self employed or will owe more than has been withheld from your salary, you have until January 17th 2012, to pay your fourth quarter estimated taxes for 2011. Most states give you until mid January too, but if you want to deduct that fourth quarter state tax payment on your 2011 federal income tax return, you must get the money to your state before Dec. 31.
4. Begin your wealth transfers. If you’ve already made those $13,000 annual gifts for 2011, you can wait until after the first of the year to consult an attorney about transferring more wealth. But don’t delay too long. The current estate tax law, which allows you to give $5 million to your kids and grandkids while you’re alive, expires at the end of 2012---at which point the amount you can give away drops to $1 million. Moreover, certain sophisticated techniques—such as a grantor retained annuity trust—that enable you to give away a lot more than $5 million, benefit from current low interest rates. Plus, there’s no guarantee such techniques won’t be limited in any future deal to renew the $5 million exemption. (In fact, the Obama Administration has proposed restrictions.)
5. Write to your Congressman. Fed up with how uncertain the tax code has become, with dozens of provisions expiring each year? Enjoy your holiday now and write an angry letter after the good cheer has worn off.
Let’s face it. Most of us put off tax chores from time to time---not as chronically or recklessly as Congress, but often enough that it can end up costing us. So as a service to the frazzled, here are 10 money saving moves that must be made before Dec. 31 and five others that can be safely postponed until the beginning of next year.
BY DEC. 31:
1. Grab expiring tax breaks. Dozens of tax breaks expire on Dec. 31, and while Congress is likely to reauthorize some of them retroactively, others could permanently disappear. So, for example, if you’re self employed or own a small business and are in the market for a new vehicle, consider buying before Dec. 31. Until then you can write off the full cost of purchasing a new luxury SUV—provided it’s used 100% for business and its gross vehicle weight is more than 6,000 pounds. (More details here.) If you’re considering making energy efficient home improvements, get the work done before Dec. 31 to take advantage of an expiring $500 tax credit. (More on this green credit here.) What about the expiring payroll tax cut you’ve heard so much about? Unless you run the payroll department of a business, there’s nothing you need to do about it.
2. Check the terms of your medical FSA. With a medical flexible savings account, money is deducted from your salary before tax and put in an account to pay medical, dental and vision expenses not otherwise covered by insurance. The catch is, by law, any money you don’t spend in the year it’s saved is forfeited. Back in 2005, the IRS ruled that employers can give workers an extra 10 weeks---meaning until March 15th of 2012 if a plan is on a calendar year, as most are---to use up their cash. But not all employers allow this grace period. So check your plan terms and FSA balance immediately---you might need to order those new contact lenses or go to the chiropractor before Dec. 31. (For surprising ways to use up your FSA dollars, including driving to Wal-Mart to pick up a prescription, click here.)
3. Get charitable checks in the mail or donate online. To claim a deduction for a 2011 charitable contribution, you must mail your check by Dec. 31. You don’t have to worry about the check actually clearing before the end of the year, but play it safe and put it in the mail before the 31st. Any donations you charge to your credit card by Dec. 31 are also deductible for 2011, even if you don’t pay your credit card bill until next year. You’ll find 12 tips for yearend charitable giving from Kelly Phillips Erb, a.k.a. Taxgirl, here . If you would like a deduction for 2011 and aren’t sure yet what charity you want to benefit, Ashlea Ebeling explains here the appeal of a donor advised fund. By contributing to one of these funds, you can claim a deduction for 2011 and then dribble out the money to specific charities when you’re ready. For help picking a worthy charity, Forbes rates the 200 largest here.
4. Accelerate other deductions into 2011. Consider making your Jan. 1, 2012 mortgage payment, or paying state and local tax bills due in January, before the end of 2011. That will give you the tax savings from those itemized deductions a year earlier. Warning: If you are subject to the alternative minimum tax or expect to have a much higher income in 2012 than you had for 2011, accelerating deductions can backfire---so check with a tax pro if you think you might be in that situation.
5. Harvest capital losses if you have them. Sell losing positions in your taxable (meaning non-retirement accounts) to offset any taxable capital gains you’ve realized during the year. Didn’t take any gains this year? Watch out, your mutual fund may have taken them for you; taxable gains get passed on from funds, even if you’ve sold no shares. Anyway, up to $3,000 a year in net capital losses can be used to offset ordinary income (say from your salary), and the rest of any excess losses you harvest can be banked to offset gains in future years. Forbes Investment Strategies columnist William Baldwin explains the basics of capital gains here and how to harvest losses without risking missing out on a market move or running afoul of the “wash-sale” rule here.
6. Make annual gifts to family and friends. You can give $13,000 a year to as many people as you want without it counting against the amount you can give during your life without having to pay gift tax. That lifetime gift tax exemption is currently $5 million, but is scheduled fall to $1 million in 2013. The annual exclusion is a use it or lose it proposition---if you don’t use the 2011 exclusion by Dec. 31, you can’t bank it. (Deborah Jacobs has more advice on tax smart ways to give to family and friends here.)
7. Contribute to a 529 state college savings plan. Thirty-seven states permit you to claim an income tax deduction (anywhere from $500 to Pennsylvania’s generous $13,000 per beneficiary) for contributing to a 529 state college savings plan. But to get the tax break for 2011, you must contribute before the end of the year. You can find an up-to-date list of breaks here at Savingforcollege.com. This isn’t just for people saving for their kids’ or grandkids’ educations. If you’re planning to go to graduate school, you can contribute to a 529 for yourself. In fact, Ashlea Ebeling explains here that you can contribute in December, bank your tax break, and then use the money in the 529 for graduate classes in 2013. (Of the states that give tax breaks, only Indiana has a 12 month holding period before you can use a contribution.)
8. If you’re self-employed, set up a one-person 401(k) . So long as you set up a one-person 401(k) by Dec. 31, you can make contributions for 2011 until the due date of your 2011 return with extensions—as late as Oct. 15, 2012, if you operate as an unincorporated sole-proprietor attaching a Schedule C to your individual tax return. Mutual fund companies, including Fidelity, the Vanguard Group and T. Rowe Price offer easy-to-setup one-person 401(k)s, as do Charles Schwab , Merrill Lynch and Edward Jones. More on the benefits of a solo 401(k) is here.
9. If you’re an employee, max out your 401(k). If you have an accommodating payroll department and haven’t yet contributed the maximum allowed to a 401(k) for 2011, you might still be able to get money withheld from that last paycheck of the year. For 2011 you can contribute up to $16,500, or $22,000 if you’re 50 or older, to a pre-tax 401(k), a Roth 401(k) or a combination of the two. Contributions to a Roth won’t save you any 2011 tax, but the money in a Roth grows tax free and you can be withdrawn from the account tax free when you retire or before that if you leave the company, have had the account for at least five years and are 59 1/2 or older.
1o. Take required minimum distributions from IRAs. If you’re over 70 ½ or have inherited an IRA from someone other than a spouse, you must take an annual required minimum distribution from your IRA by Dec. 31. (If you just turned 70 ½ this year, your first RMD can wait until as late as April 1 2012. That’s April 1, not April 15th.) Your RMD for 2011 is based on the balance in your IRA as of Dec. 31, 2010 and your age, in some cases your spouse’s age, and whether the account is your own or an inherited one. (There are three different tables in the appendices of IRS Publication 590 for calculating the percentages of your balance you must withdraw.) Note that while you don’t have to take an RMD from your own Roth IRA, if you have inherited a Roth from someone other than a spouse, you must take RMDs.
Whew! Well, at least these five items can wait until after January 1st.
1. Fund an IRA for 2011. You have until April 17th 2012 (the due date for 2011 tax returns) to make a contribution to a traditional or Roth IRA. Note that the April date holds even if you get an extension to file your taxes. Those with earned income can contribute up to $5,000 a year ($6,000 if they’re 50 or older) to a traditional or Roth IRA, or a combination of the two. There are, however, income restrictions on who can open a deductible IRA or contribute to a Roth. (Details here.) If your teenage children had earned income in 2012, consider opening a Roth IRA for them. (More on this and other ways to turn your kids into millionaires here. )
2. If you’re self-employed or moonlighting, open a SEP IRA. A 401(k) isn't the best option for everyone with self-employment income. For example, if you are moonlighting and have a regular job with a 401(k), a SEP IRA is a better choice. That’s because one annual limit for contributions to a 401(k) applies to all your 401(k) accounts, combined. That means you might be able to save more in a SEP IRA. Even better, you have until the due date of your 2011 returns, with extensions—meaning until Oct. 15th 2012---to set up and fund a SEP IRA for 2011. For more on the best retirement plans for the self-employed, see Kerry Hannon’s rundown here.
3. Pay fourth quarter estimated taxes. If you’re self employed or will owe more than has been withheld from your salary, you have until January 17th 2012, to pay your fourth quarter estimated taxes for 2011. Most states give you until mid January too, but if you want to deduct that fourth quarter state tax payment on your 2011 federal income tax return, you must get the money to your state before Dec. 31.
4. Begin your wealth transfers. If you’ve already made those $13,000 annual gifts for 2011, you can wait until after the first of the year to consult an attorney about transferring more wealth. But don’t delay too long. The current estate tax law, which allows you to give $5 million to your kids and grandkids while you’re alive, expires at the end of 2012---at which point the amount you can give away drops to $1 million. Moreover, certain sophisticated techniques—such as a grantor retained annuity trust—that enable you to give away a lot more than $5 million, benefit from current low interest rates. Plus, there’s no guarantee such techniques won’t be limited in any future deal to renew the $5 million exemption. (In fact, the Obama Administration has proposed restrictions.)
5. Write to your Congressman. Fed up with how uncertain the tax code has become, with dozens of provisions expiring each year? Enjoy your holiday now and write an angry letter after the good cheer has worn off.
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