Thanksgiving is just a week away, yet that doesn’t mean your finances should be on auto pilot for the remainder of the year. You still have time to plan wisely and take action that may benefit your tax bottom-line. Here are a few ideas for moves that may prove worthwhile taking before year end.
Check your flexible spending account (FSA) balance. In the past any contributions to a FSA were subject to “use it or lose it” provisions during the year of contribution. However late this year the IRS changed the applicable rules and will now allow up to $500 to be carried forward to the following year. Note this carryforward provision does not apply universally, however, as each employer has the discretion whether to adopt the more flexible provision. Contact your plan administrator or human resources department to determine whether you may indeed carry forward a balance this year. If not, plan to deplete the current year’s balance by purchasing eligible items or incurring eligible expenses before December 31, 2013.
Harvest the investments held in your taxable accounts for any unrealized gains and losses. The markets have performed well year-to-date so it’s highly possible you may have some unrealized gains. Also review your investment holdings to determine if you may have any unrealized losses to date or any loss carryforwards from prior years. You can use the tax laws to your advantage by selling any investments which have an unrealized loss if held in a taxable account. You can then net dollar for dollar any realized losses in such accounts against any realized capital gains; any amounts for realized losses that exceed realized gains can be used as a direct offset, up to $3000 in any given year, against your other taxable income.
Accelerate any planned big ticket purchases into 2013 to ensure a deduction for sales taxes on the purchase.
Consider converting a portion/your IRA account to a ROTH IRA, especially if you can do so without exceeding the maximum adjusted gross income threshold for your current tax bracket. Tax diversity will likely gain in importance in future years as the country copes with the growing federal deficit and expanding entitlement programs. So converting a Traditional IRA to a ROTH today and paying the subsequent tax liability at today’s lower rates may prove very beneficial should future rates rise significantly.
Several tax provisions are scheduled to expire at the end of 2013, unless Congress acts to extend them. These include:
- an above-the-line deduction for classroom expenses incurred by educators, up to $250;
- itemized deduction treatment for state and local taxes paid by individuals who reside in a state without a state income tax;
- exclusion from an individual’s gross income for the discharge of indebtedness on a qualified principal residence;
- an above-the-line deduction, up to $4000, for qualified higher education expenses (note: this must be coordinated with other available education credits);
- deductibility of mortgage insurance premiums paid on a primary or secondary qualified residence; and
- an IRA Qualified Charitable Distribution where individuals who are age 70 1/2 and over can contribute up to $100,000 directly from an IRA to a qualified charitable organization and exclude the distribution from their taxable income.
These are just a few end-of-year potential moves that may help save on taxes. Consult with your financial adviser or tax professional to consider your specific situation and to ensure that you comply with all applicable provisions.