Now is a good time to review some important year-end financial tasks—rather than waiting until the end of year when you may have less time. Most of them can be accomplished quickly, but the benefits can last a lifetime.
Here’s a list of 10 smart planning tasks—some that need to be addressed by December 31 and others that you should make part of an annual financial review.
1. Estimate your total tax and check your withholding.
If you received a large refund on your 2013 taxes, or had to pay a large amount to the IRS, you may want to consider adjusting your withholding rate. Ideally, you should fine-tune your withholding to pay just as much as necessary to avoid giving the IRS a free loan (which is really what overwithholding amounts to) or owing a penalty for underpayment.
Barring any significant life events or income changes, a quick way to evaluate where you stand is to look at your tax liability from 2013 and compare it with what you’re on track to have withheld in 2014 (based on the year-to-date figure on your most recent pay stub). If the two numbers aren’t close, consider making changes to the Form W-4 you have on file with your employer. For a more complete explanation of how to adjust your withholding, read Viewpoints “Are you giving the IRS an interest-free loan?”
2. Donate to a charity.
Charitable contributions can be an effective last-minute tax deduction. If you’ve been meaning to make a donation and want to lower your tax bill for 2014, be sure to make your contributions before the end of the year. You might want to consider a donor-advised fund, which can help you combine the favorable tax benefits with the flexibility to easily support your favorite charitable causes when you want.
If your adjusted gross income (AGI) is above $300,000 as a married couple filing jointly or $250,000 as a single taxpayer, you should also acquaint yourself with the Pease rule. Confusion surrounding the rule left many high-income taxpayers concerned that it would diminish the tax deduction value of charitable contributions.
3. Consider selling investments that have lost value.
Many investors employ tax-loss harvesting as a strategy for reducing taxes on realized gains from winning investments. To claim any losses against this year’s realized capital gains, you’ll need to sell your investments that have lost value by the end of the year. Read Viewpoints: "Tackle taxes: Got gains or losses?"
4. Bunch itemized tax deductions.
One way to maximize the value of tax deductions is to bunch two years' worth of itemized deductions into a single year. For example, if you have unreimbursed work expenses that you incurred early in the year, you might be able to pull next year’s expenses into this year and double up your 2014 deduction.
5. Make an extra contribution to your 401(k).
Even if you contribute regularly to your tax-deferred workplace retirement savings plan, such as a 401(k) or 403(b), take a few minutes to see whether you can make an additional contribution before the end of the year, especially if you haven’t reached your full employer match. Think about it this way: An extra $500 contribution every year for 20 years could add up to $23,000. (This example assumes a 7% annual rate of return and no withdrawals during the period. The future value does not reflect any federal, state, or local taxes.) The maximum you can contribute in pretax dollars for 2014 is $17,500, or $23,000 if you’re over age 50. It also reduces your taxable income for the year.
6. Use the money in your flexible spending account.
There are two types of flexible spending accounts, which allow you to set aside pretax money and then reimburse yourself, with calendar-year “use-it-or-lose-it” deadlines: health care and dependent care. The U.S. Treasury Department did relax the rules a bit this year. Employers can allow participants to carry over up to $500 in unused funds into next year, so make sure your balance doesn't exceed that. Some plans allow you to submit 2014 claims until March 2015, but check with your employer.
7. Review your investments.
Year to date, the broad stock market has outperformed the bond market by a wide margin, meaning your balance of stocks and bonds may have changed. You may need to bring your portfolio back in line with a diversified mix that is best for your situation (read Viewpoints: "The pros' guide to diversification"). For help analyzing your overall portfolio, choosing a target asset mix, and rebalancing your portfolio to bring it in line with that target mix, use Portfolio Review.
8. Check the beneficiaries on financial accounts.
When reviewing your investments, also make sure you have designated a beneficiary for each account. It can be as important as writing a will, but it isn’t as complex. It is especially important if you have some changes in your life, such as a birth, or a death, or a change in marital status.
One important point to keep in mind is that retirement accounts pass directly to named beneficiaries, rather than becoming part of your estate. That can provide significant tax advantages for your heirs.
If you are married, keep in mind that most employer-sponsored retirement plans automatically designate your spouse as the beneficiary unless you name another beneficiary and your spouse has consented in writing.
9. See whether you are saving enough.
The end of the year is a good time to evaluate whether you’re on track to achieve your retirement savings goals. Our Retirement Quick Check calculator can help. If you’re behind, you might consider increasing your contribution rate for your 401(k), or other workplace retirement savings account, if you have one. Consider opening an IRA, which could also lower your tax bill if you are eligible for a deductible IRA. You can check with our IRA contribution calculator.
You can contribute up to $5,500 for 2014 and, if you’ve reached age 50, an extra $1,000, right up until the April 15 tax-filing deadline.
10. If you're over 70½: Take your minimum required distribution.
If you’re over age 70½, don’t forget to take your minimum required distribution (MRD) from your IRA or 401(k) before the end of the year. The penalty is steep: a 50% tax on the amount not taken in addition to regular income tax on the amount that should have been withdrawn.
If you reached 70½ this year, you have until April 1, 2015, to take your 2014 distribution, but it still might be a good idea to do it before the end of this year. Why? Because if you wait, you’ll have to take two distributions in one year (the grace period only applies to your first distribution, so your 2015 MRD will have to be taken before December 31 of next year). That could push you into a higher tax bracket for 2015. Use our MRD calculator.
- Review your year-to-date tax information on your nonretirement accounts. Go to Fidelity.com, "Accounts & Trade"; then, log on to "Portfolio," and select “Tax Info (Year-to-Date)” from the “Select Action” drop-down menu for the desired Fidelity account.
- For a wide range of information and tools, visit the Fidelity Tax Center.
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