5 Smart End-of-Year Money Moves

Start pondering your resolutions and queue up Auld Lang Syne: 2010 is almost over. Rather than wait for the new year to make changes, take a moment now to focus on a few smart year-end financial moves that can save you big bucks come tax time.

Use it or Lose it: Flex Spending

1. If you have a medical flexible spending account through your employer, check the balance and use it up before the ball drops on 2010 (or by the end of your company’s grace period).

Schedule appointments and/or purchase necessary medical items before the year ends, since you will lose any unused funds. Funds set aside in Flex Spending accounts are pre-tax dollars, so maximize this benefit by spending all set-aside funds.

While you are at it, assess your family’s upcoming medical needs and determine whether your Flex Spending level for 2011 should remain the same or be adjusted up or down. Make the necessary changes at your company’s next open enrollment window.

Here’s a look at other upcoming flexible spending account changes in 2011.

Give a Gift

2. The holidays are a great time to make a charitable cash donation to a cause of your choosing. Donors must be able to produce a receipt or bank/credit card statement for each donation. For cash gifts over $250 donors must have a receipt or written acknowledgment from the qualified organization.

A great way to kill two birds with one stone is to make a charitable contribution in someone else’s name. Most charitable organizations have holiday programs that allow you to make a donation as a gift.

Making a donation to a worthy cause on behalf of someone else is an ideal way to avoid the excess materialism associated with the holidays. A charitable donation can be a wonderful gift for children or parents alike, providing a great lesson for young and old.

Save for the Future

3. Open or contribute to an individual retirement account, such as an IRA, SEP-IRA, Roth 401(k), or Roth-IRA.

Making a year-end contribution to your personal retirement account is, in most cases, a direct way to lower your taxable income. If you are under 50, you can contribute up to $5,000 to a traditional or Roth IRA. The limit is $6,000 for taxpayers over 50. SEP IRA contribution levels are tied to your self-employment income.

Although a Roth IRA contribution does not reduce your Adjusted Gross Income like a traditional IRA, they are an excellent financial vehicle for those who do not plan on taking disbursements from their individual retirement account.

Roth IRA conversions are up sharply this year, since income limits have just been eliminated. If you can manage, make the maximum contribution to your retirement account allowed by law. The immediate tax savings (excluding Roth funds), plus the long-term financial boon, make this move a win-win.

Not sure which retirement plan is right for you? Check out the following comparisons of self-employed retirement plans and other retirement savings accounts.

Whittle Away at the Estate

4. Older investors should consider making a cash gift to children or grandchildren in order to lower their overall estate value.

The goal is to gradually reduce the value of your estate so that at the time of death, estate taxes are reduced or eliminated. Cash gifts of up to $13,000 per recipient ($26,000 if you give as a couple) are permitted annually without requiring a gift tax return. Better that your assets should go directly to your loved ones rather than into the coffers of the IRS.

For the very wealthy, there might be a major loophole in the 2010 tax code: specifically the Generation Skipping Transfer (GST) Tax rates for 2010. Generally speaking, a GST allows a taxpayer to pass assets to grandchildren, or much younger non-relatives. The tax rate, which was 45% in 2009, and predicted to go to 55% in 2011, has lapsed for 2010—meaning 0% GST tax on these gifts. Congress was scrambling to rectify this loophole, but for now, it is still on the books.

Time is Money!

5. I am always amazed at how many people will let the year come to a close with unused vacation days still available to them.

Sometimes if you don’t have holiday travel plans, and don’t have anything special to do, it might seem easier just to head to the office-well think again! Your time is money.

There are many productive ways you can use your hard-earned vacation time. You can work on your side hustle (if you have one), work a seasonal job, make and freeze homemade dinners to save on food bills, sell stuff on eBay or at a garage sale, or tackle a home improvement project.

Letting accrued vacation expire is like giving money back to your boss. Turn your extra vacation days into a financial positive instead of letting them go to waste. Even if you do nothing productive, catching up on rest and recharging your batteries will make you more productive in the new year.

Comments

  1. I would also add that if you are a part time college student and have enrolled in next semesters classes, pay for your textbooks and any other supplies before the end of the year to get as much bang for the buck you can for the education tax credit this year.

  2. My husband had two weeks of accumulated vacation time he had to use this month. He made it fun for the family by not telling us. Each day I would think he was heading to work. He would smile and then I realized he had the day off. He did this over and over again. I finally caught on the second week. It was a nice break for him, after working so hard all year.

    His time at home also made us realize what life would be like for us when all our children grew up and moved out. We are only a few years away from an empty nest and it can get scary!

    A good vacation at home can also recharge the family.

  3. We were very lucky to have a healthy family this year with only minor medical/dental bills to pay out of our flex spending account. I was able to use the leftover flex balance this month and get new eyeglasses/sunglasses and contact lenses for myself and my daughter. Anyone who wears glasses/contacts knows this can be a hefty expense so it was a nice treat for us to be able to cover that with the flex money.

  4. If you have leftover vacation days this year that don’t carry over, you do lose them at some corporations which is kind of sad that you earned those days and didn’t use them! Those same corporations take vacation donations — where you can donate days you don’t plan on using to someone less fortunate that has a major illness or needs to care for a loved one and would otherwise not get paid. Think of that for next year when you are planning your vacations; donate those unused vacation days. With my company, however, you have to donate those days when you are making your yearly benefit decisions, so those donations have to be made in October or November. But something to think about for the future!

  5. I’m going to start contributing to retirement starting in the beginning of the year. The account is set up and waiting for my hard earned money.

  6. I didn’t like Flex Spending accounts before, but now they’re eliminating being able to use it for over the counter drugs. What’s the point? You’re practically gambling whether or not you get sick. You either get sick or lose your money. It sounds like a lose-lose to me.

    • I suppose if you knew ahead of time that you were having a medical/dental procedure, and/or you have to take prescriptions regularly, setting aside enough funds to cover them would make sense because it does lower your taxable income. However, you’re right, it is still a gamble.

      And to clarify, a reader recently pointed out that you can still use the FSA for OTC meds, but they do require a prescription. This essentially eliminates the benefit for me because I refuse to schedule an office visit to ask for a prescription for allergy medicine.

    • They can be used for well visits too (annual exams, dental visits, eye exams and glasses/contacts, etc.) Even if I don’t have any other medical needs for the year, those costs already add up.

  7. With just 10 days left, it’s high time to make it, on the other hand every occasion is for short time only. I just wish I could do such med checks in Poland, because here so many people came to private or employers health programs, that even if you participate, you have to wait several weeks to get a visit ;)

  8. Now is the time to focus on making use of the FSA funds you have remaining, no question. I have purchased a whole list of OTC products…contact lens solution, anyone? I’m holding a 6 month supply of it now, courtesy of FSA funds. Can’t buy it with these funds next year.

    As for the comment above about FSA funds being a gamble, i don’t really agree. If you look at your historical medical expenses, you can at least get some idea of what you spend annually. Let’s say over the last 5 years you spent from $300 to $900 annually, you could feel safe by setting aside the low end of that range, and not waste the money. Or, if you know you’ll be having some procedures or prescriptions in the upcoming year, you can set aside for those. Either way, I can’t agree that FSA is a waste or a total gamble. You’re leaving money on the table by NOT taking advantage of these, even if it’s in a limited way.

  9. Absolutely true! Letting vacation days expire is like giving away free money. Take advantage of every financial opportunity you are provided with! Great post!

  10. Good year-end tips. I’ll heed the advice of those that apply to me. :)

    There’s a lot more you can do with your FSA, though, aside from just paying a doctor’s copay and buy medicines.

    If you incurred gas, parking, plane or bus fare expenses related en route to receiving medical care, you can actually get reimbursed with FSA funds. I didn’t know all eligible expenditures until reading this article:

    http://www.bankrate.com/finance/taxes/use-or-lose-your-flexible-spending-account-1.aspx

  11. I was talking to a friend the other day who said she buys a ton of sale items at CVS at the end of the year with her flex bucks. She then turns around and sell them on Ebay to get her money back. Interesting idea…Anybody ever done that with their flex dollars?

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