Nine Ways to Give Your Finances an End-of-Year Tune-Up

Share

Nine Ways to Give Your Finances an End-of-Year Tune-Up

As the year wraps up, it’s time to start thinking about deadlines—and there are a handful of financial deadlines to meet by the end of the year. Here are a few money moves you should make before the new year.

These moves will help organize your taxes, optimize your deductions and, generally, make sure your end-of-year finances are in order.

Get More Tax Advantage From Your 401(k)

As we explained in our 401(k) primer, the amount you save in your account is tax-deferred. This means whatever savings you make into the account you can deduct from your taxable income.

You have until December 31 to contribute to your 401(k) or 403(b). So if you want to reduce your taxable income in April, you should make those contributions now. The 2014 401(k) contribution limit is $ 17,500, or $ 23,000 if you’re 50 or older.

The Traditional IRA is also tax-deferred, but you have until April 15 to contribute to your IRA. The limit is $ 5,500 for 2014 ($ 6,500 if you’re age 50 or older).

Make Tax-Deductible Donations

Donating to charity is just a nice thing to do. But if you want to reap the tax benefits, you’ll want to do it soon. Any charitable contributions you make before December 31st will be tax deductible for your 2014 taxes. So donate your old clothes. Support your local indie radio station. Give to a nonprofit. And if you want to use your donation to reduce your tax bill, make sure to get receipts and keep records.

Use Your FSA Money

Flexible Spending Accounts (FSAs) let you save pre-tax dollars for qualifying medical expenses. During open enrollment, you decide how much of each paycheck you want to save in the account. Like a 401(k), you can deduct the savings from your taxable income. Unlike a 401(k), if you don’t use that money by the end of the year, you lose it (well, some of it).

IRS rules allow employers to carry over $ 500 of your money into the next year. Or, they can give you a grace period. Either way, many people find themselves having to spend their FSA money before the end of the year. And it’s not always as easy as it sounds, because you can only spend it on “qualifying medical expenses.” I wrote about FSA end-of-year spending a while back at Bargaineering. Here are some suggestions on how to spend that money:

Need eyeglasses or contacts? Make an appointment for a vision exam. Need to refill a prescription? Call your doctor and get thee to a pharmacy. Back hurts? Consider an acupuncture or chiropractic visit, both of which can be paid for with FSA funds.

While over-the-counter drugs now need a prescription to be eligible, there are plenty of other FSA-eligible over-the-counter items that don’t require a prescription: bandages, breast pumps and reading glasses, for example. Purdue University has developed this handy database of eligible and ineligible items.

Of course, you can also use the money on doctor’s visits and more obvious medical expenses. Check out the full post for more suggestions.

Order Tax Forms

If you’re a business owner, or even if you’re self-employed, you might have to file some specific tax forms before the end of the year.

1099s are the most common example. If you hired a contractor or a subcontractor and paid them more than $ 600, you’re required to send out 1099s. And you have to fill and mail them out before Jan 31st, so you should order them soon.

Adjust Your Tax Withholding

Getting a big tax refund sounds like a good thing. But really, it’s not. It means you’re giving the IRS too much during the year. That money could be better used to pay down high interest debt. Or, you could save it and earn a little interest. Either way: ideally, you want to pay just the right amount of taxes during the year. No more, no less.

If you expect you’ll pay too much or too little in taxes come April, you can fill out a new W-4 with your employer before the end of the year. Saving to Invest suggests doing this especially if you have other variable income:

It includes income from interest (savings and CD’s), dividends, capital gains, self-employment income, IRA and certain Roth distributions. You can however still withhold taxes for these items via your paycheck (or make a quarterly estimated payment). A good way to ensure you have enough set aside is to submit an updated W4 towards the end of the year when you have a much better idea of what your taxable “investment” income will be for the year.

If you’re self-employed and you pay quarterly estimated taxes, you’ll make your final payment for 2014 in January. Calculate how much you’ve already paid, and how much you’re expected to owe, then pay accordingly.

Harvest Tax Losses

We’ve talked about capital gains in our primer on investing and taxes. Basically, when you sell your assets and make a profit, you’re taxed on that profit, which is called a capital gain.

To offset the taxes on capital gains, some people use capital losses. They sell any assets that have plummeted, take the hit and report the loss on their taxes. This is called “tax-loss harvesting.” Investopedia offers an example:

Imagine that on the first day of any given year, you invest $ 100,000 in the U.S. stock market via an exchange-traded fund (ETF), like SPDR S&P 500. Let’s assume this ETF trades off by 10%, falling to a market value of $ 90,000. Rather than feeling sorry for yourself, you can sell the ETF and reinvest the $ 90,000 back into the stock market.

Although you are keeping your market exposure constant, for IRS tax purposes, you just realized a loss of $ 10,000. You can use this loss to offset taxable income – leading to incremental tax savings or a bigger refund. Since you kept your market exposure constant, there really hasn’t been a change in your investment cash flow, just a potential cash benefit on the tax return.

Investopedia also lists a handful of IRS limitations with tax-loss harvesting, and it’s a complex topic, so be sure to check out their full post for more information on this move.

Fund 529 Savings Plans

In some states, contributions made to a 529 college savings plan is also tax-deductible. Edward Jones explains that you have to file by December 31 to receive any state income tax deduction. There are a few exceptions. Georgia, Mississippi, Oklahoma, Oregon and South Carolina let you deduct contributions made up until their tax-filing deadline next year.

Make Early Tax-Deductible Payments

You might qualify for tax breaks on certain payments. Make them early, and you can maximize your deductions in April.

For example, if you qualify for the home mortgage interest deduction, you might consider making your January payment in December. Keep in mind, though, this only works with your January payment. Bankrate points out that your mortgage payments are made at the “end of your occupancy period.” They explain:

By accelerating that payment even by just a day, you get an additional tax deduction for the interest paid. Don’t get greedy, though. You can’t make your February, or any other upcoming, mortgage payment early to boost your year-end tax deduction amounts. Tax law generally prohibits write-offs for prepaid interest (there is an exception for loan points in some cases). Each year, you can deduct only the home mortgage interest for that year.

They add that you also want to make sure you give that payment enough time to process. This way, the interest will show up on your annual statement in time.

TurboTax points out that you can also do this with property tax payments and tuition. Check out their post for more detail on each of these.

Evaluate Your Financial Goals

If you made any financial resolutions, now is obviously a good time to review them. But even if you didn’t, you might consider reviewing your financial situation and making some goals for the new year.

Take a look at your budget and your spending. We’ve written about how you can reform your budget by organizing your focus on four areas:

  • Food
  • Entertainment
  • Large expenses
  • Small expenses that add up

And our own Melanie Pinola has also written about the most common ways we waste money. Some of these money-wasters are easy to overlook. At the end of the year, review your annual spending and decide if there are any areas in which you’d like to cut back. Make or revisit any financial goals.

Of course, anytime is a good time to think about goals, but the end of the year seems like a natural time to review and assess them.


Two Cents is a new blog from Lifehacker all about personal finance. Follow us on Twitter here.

Lifehacker

Share