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Give yourself the gift of year-end tax savings

Updated: May 3, 2013 12:14PM



Originally published: December 16, 2004

Note to my Editors and Producers: Don’t come crying to me in April, asking me to come up with great tax-saving ideas for readers and viewers. By April, it’s almost too late.

Now December, when you’re asking for holiday gift ideas, is really the time to be thinking about next year’s taxes. But you’ll hate me for spoiling the holiday mood. Nonetheless, I’ll file this column in hopes that you’ll let me off the hook next spring -- when I’m busy doing my own taxes!

Here’s what I’m doing now -- and some year-end planning suggestions for you:

Add to Your 40l(k). If you haven’t contributed the maximum possible ($13,000), or at least enough to get your employer’s matching contribution, ask the Human Resources department if you can maximize your contribution out of your last paycheck of the year. It won’t leave you much money to pay your January bills, but a good part of that money would have gone in taxes anyway. In fact, an additional year-end contribution could lower your tax bracket.

Open a Keogh Plan. A Keogh plan or Individual 401(k) allows you to contribute as much as 25 percent of your self-employment income to a retirement plan -- much more than an Individual Retirement Account. You don’t have to make the full contribution by year-end, but you must establish the plan. Check at your bank, broker or major financial services companies such as Fidelity and Schwab.

Balance capital gains and losses. If you invested outside your retirement plan and had capital gains -- a distinct possibility with the S&P at a three-year high -- make sure you take losses to offset your gains. If you have stocks that have lost money this year and that you don’t want to hold onto, this is the time to sell them, and record the capital losses against your capital gains. And even if you don’t have gains, you can offset $3,000 of capital losses against ordinary income tax.

Evaluate donations. Make charitable contributions before year-end, and be sure to get a receipt. If you’re going to donate your car or boat to charity, do it in the next two weeks. Starting in 2004, your deduction for a vehicle or boat is limited to the price the charity gets for selling it.

Plan to defer income. If you have some flexibility, try to postpone income until 2005. You’ll still pay taxes on the money, but you’ll have the use of the cash for a longer time. So maybe the boss will pay your bonus in January, or postpone your last paycheck until the first week in January. You might also want to accelerate deductions, as in the following examples.

Prepay real estate taxes. Ask your county assessor for your real estate bill, and prepay 2005 property taxes before year-end. This gives you a current deduction. Of course, it also locks you into this strategy on an annual basis -- or you’ll miss out on next year’s deduction!

Prepay your January mortgage. Just as with your property taxes, you’ll want to get the deduction this year -- especially if you think you’ll earn less next year. Again, once you start, you’ll want to keep using this strategy every year.

Prepay state income taxes. If you itemize your deductions, the state income tax you pay this year can be deducted on your federal return.

Make family financial gifts. You’re allowed to give anyone up to $11,000 per year, without impacting your eventual estate tax, if there is an estate tax when you die. So, if you’re planning to give gifts to children, family members or anyone else, do it before year-end to take advantage of this year’s exemption.

Spend your flexible plan. If you have a company flexible spending plan that allows you to pay for approved medical expenses on a pre-tax basis, make sure you’ve used up that money for 2004. If you don’t use it, you’ll lose it. The rules for allowable expenses have been liberalized. Now you can stock up on everything from cough medicine and aspirin to Nicoderm quit-smoking patches. Go to www.drugstore.com for a list of approved over-the-counter medical supplies that qualify for your Flexible Spending plan.

Obviously not everyone can move money around in this manner. You have to have the flexibility and the cash to take advantage of these strategies. But it’s worth your time and effort to try to minimize income taxes or at least postpone them.

Maybe one day we’ll do away with the income tax completely and substitute a national sales tax. Or maybe we’ll do away with deductions and have a flat tax. Would I miss doing this annual year-end tax column? Not at all! And that’s The Savage Truth.

Terry Savage is a registered investment adviser and appears weekly on WMAQ-Channel 5’s newscasts. Distributed by Creators Syndicate.



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