6 Critical Considerations For End-Of-Year Financial Planning

The holiday season is almost upon us and, for many, this means time spent with family and friends reflecting on the blessings in life and on those we hold dear.

Of course, it’s also time to get ready for the coming year – and that includes conducting a year-end financial checkup.

This is especially important for making sure your financial plan is on track toward your goals, as well as for ensuring your financially related actions are a reflection of your values.

Here are 6 critical considerations to support you as you wrap up 2014 and prepare for a financially healthy new year:

#1: Maximize Your Retirement Plan Contributions

The 401K contribution limit for 2014 is $17,500 with a $5,500 catch-up provision if you are age 50 or older. Keep in mind that these are IRS limits and your plan may have different limits, so make sure to consult your plan administrator.

If you’re a business owner, you may be able to put even more retirement money aside if you have the right plan. SEP plans, for example, have a maximum contribution limit of $52,000 or 25% of your compensation. There’s still time to establish a SEP plan prior to year-end if this task got away from you this year.

#2: Give Generously, but Wisely

The holiday season often makes us feel more charitably inclined and giving money to charity can provide a dollar-for-dollar reduction to your taxable income, depending on the type of charity and subject to certain income limitations.

With the strong performance of the stock market over the past few years (recent weeks aside!), you may have appreciated stock that you or your advisor would like to sell, but the taxable gains are holding you back. In this case, it might be wise to gift that stock to charity. Because of the tax advantage, you can give the full amount of the value of the stock, rather than selling the stock, paying the tax and then giving the amount left over after taxes to the charity. Most charities accept stock donations, which they then can sell with no tax consequence.

There are many other creative ways to satisfy your charitable inclinations – so feel free to contact us to discuss your options.

#3: Take Full Advantage of the Annual Gift Tax Exclusion for 2014

Each taxpayer is allowed to gift $14,000 to any individual in 2014 without having to pay gift tax. For a married couple, the combined maximum gift is $28,000. This is an excellent wealth transfer strategy, effectively reducing the net worth of the giver with potentially no tax consequences to themselves or the recipient.

#4: Education has No Limit

If you’re paying education expenses on behalf of someone else, that amount is outside of the annual exclusion amount. There is no limit on what you can pay for someone else’s education, as long as the payment goes directly to the educational institution. Check with your tax advisor to make sure you understand the tax impact of any gifts you make.

#5: Beware of the Mutual Fund Tax Trap as Year-End Approaches

Most mutual funds pay out the majority of their distributions as early as November. These are taxable unless owned in a qualified retirement account. The distributions are generally divided equally among all shareholders as of a certain date, and do not take into consideration how long each investor has owned the fund.

This means that buying a mutual fund close to year-end could put you into the unfortunate situation of having to pay tax on a year’s worth of gains on a fund you only owned for a few days.

#6: Match Capital Gains with Losses

Because the stock market has been primarily on the rise for the past several years, you may not have a lot of capital losses to capture. However, check to see if you have loss carryforwards from prior years that could be used to offset the taxes from gains this year. You can offset up to $3,000 in ordinary income with loss carryforwards. But if you do have gains, you could get an even larger offset.

We hope you find these 6 considerations valuable during your year-end financial check up. As always, if you need our support in maximizing your opportunities, feel free to contact us anytime. We’d be happy to take a look at your unique situation to help you make the smartest decisions possible.

This article is not intended to be tax advice. Please consult with your tax advisor for specific guidance for your situation.