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.
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.