Thursday, November 28, 2013

Year-end financial planning checklist

Happy Thanksgiving. Today is a special day to enjoy with family and friends and reflect on how fortunate we all are to have what we have and to live in a country where we can enjoy life, liberty, and the pursuit of happiness.

Thanksgiving is also a reminder that we are entering the hustle and bustle of the Christmas holiday season with less than five weeks left in 2013. That leaves very little time to wrap up year-end financial matters. So here is my annual checklist, updated as usual for current tax law.

1. If you are a high income taxpayer, be ready to pay more tax. If you read my recent columns you are already aware of the new Net Investment Income Tax, the higher rates on capital gains and dividends, the phase-out of itemized deductions, and the Medicare earned income surtax.

2. If you were 71 or older in 2013, make sure you take the required minimum distribution (RMD) from your individual retirement account (IRA) before Dec. 31. If you don't, the IRS can penalize you 50 percent of the amount you should have withdrawn.

3. If you inherited an IRA in 2013 from someone who was taking required distributions, make sure that person took their RMD before they died. If not, then you must take it for them or pay the 50 percent penalty. And you must start taking distributions based upon your own life expectancy next year.

4. If you turned 70½ in 2013, you can wait until April 1 to take your 2013 RMD. You must still take your RMD for 2014, so it may not be tax-wise to wait.

5. If you are self-employed, review your retirement plan options and year-to-date contributions. Your choices include simple IRAs, SEP-IRAs, individual 401(k)s, and defined-benefit plans. Some plans must be in place by the end of the year. Check with your tax or financial adviser.

6. Examine your investments. If needed, rebalance your portfolio. If you have mutual funds or stocks that you want to sell or replace, look for losses to offset the gains.

7. Make your charitable donations now. If you own an IRA and are over 70½ you can instruct your IRA custodian to make a tax-free charitable contribution directly from your IRA using what the IRS refers to as a qualified charitable distribution.

8. You can give as much as $14,000 this year and next year to another person without filing a gift tax return. A married couple can give up to $28,000 per person. If you give by check, encourage the recipient to cash the check before Jan. 1 so you can prove the gift was made in 2013.

9. Set up a college savings (529) plan for your grandchild, niece, or nephew. You can contribute up to five years' worth of $14,000 annual exclusions all at once. That $70,000 is not taxable as a gift, does not count against your lifetime gift tax exclusion, and will not be included in your estate if you live for five years.

10. Ask your tax professional if you should pay your state estimated income tax before Jan. 1 so you can deduct the payment on your 2013 federal income tax return.