Second in a 2-Part Series
In part one you have madly scrambled to increase your retirement plan savings and sign up for your Flexible Spending Account during the last milliseconds of open enrollment. Now, let’s talk about the other 3 items on the list.
#3 Harvest Tax Losses
In your non-retirement (a.k.a. taxable) accounts, you report and pay taxes on dividends and capital gains each year. If you sell an investment for a loss, you can write off that loss on your taxes each year. The maximum loss is $3,000/year.
If you have a gain in one investment and a loss in another, you can offset the gain by selling both the gainer and the loser. There is no limit to the amount of gain that can be offset by a loss.
You must sell your investments for gains/losses by December 31, 2014 in order it to count on this year’s taxes. Wash Sale Rule: If you sell an investment for a loss and re-buy that same investment within 30 days, you cannot take the write off for the loss on your taxes.
Example: Joe and Jane own 2 investment in their joint account.
- Mutual fund ABC has gained $2,000 since they bought it
- Mutual fund XYZ has lost $1,000 since they bought it.
- Joe and Jane can sell both funds, but only report a $1,000 gain on their taxes, since the $1,000 loss in XYZ offsets $1,000 worth of the gain of ABC.
- Or, they could sell just enough of ABC to realize $1,000 loss that could be offset by selling XYZ.
- They can buy back both funds 31 days or more after selling to avoid the Wash Sale Rule
#4 Give to Charity
This is a great time of year to reflect on all that you are grateful for in your life and give to those who aren’t as lucky. Most people don’t give to charity because there is a tax benefit, but it would be foolish not to take advantage of government incentives that are out there. Some things to be aware of:
- Contributions to qualified charity made on or before December 31, 2014 can be used to reduce your 2014 income taxes.
- Keep receipts for contributions of $250 or over (i.e. donations to Goodwill).
- Cash donations can be written off to a maximum of 50% of your Adjusted Gross Income.
- Donations of securities (stocks, bonds, mutual funds) can be deducted to a maximum of 30% of Adjusted Gross Income.
- By donating securities that have gone up in value, you avoid paying capital gains when selling those securities.
- People who are over 70 ½ can donate up to $100,000/year to a charity directly from their IRAs and have the donation count toward their Minimum Required Distribution.
- If you plan to donate securities to a charity, start the process AT LEAST 7 business days before December 31st. These transfers do not happen by magic. There is paperwork, often notarized signatures are required, and the transfers take time. The donation must be RECEIVED by December 31st to count for that year’s taxes.
#5 Consider a Roth Conversion
A Roth Conversion means to transfer money from a tax-deferred IRA to a Roth IRA.
You owe income taxes on the amount you convert in the year you do the transfer.
The balance then grows tax-fee and costs nothing in taxes to withdraw in retirement.
If you are in a lower-than-usual tax bracket this year and expect to earn more in subsequent years, this could be a good time to pay less taxes on a Roth Conversion.
OK, enough financial lecturing. Get out there and stimulate the economy by buying things for relatives that they don’t need or want. All while respecting your budget, of course!
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