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End the Year Right with These Simple Tax Tips

The end of the year is upon us.  But before we launch into New Year’s Resolutions, we wanted to revisit our 4 Money Must-Dos by the end of the Year to highlight and expand upon the tax-specific advice. While immediate action is required for certain pieces of advice, others have a longer time horizon.  More practically, you may want to put a date on your calendar so you leave yourself enough time for these must-dos for your 2014 taxes in December 2014.

In the following post, we outline the key 2013 year-end tax tips for you and your loved ones – with deadlines included.  Our goal: to help you make sure you manage your taxes in a way to help your long-term financial health.

Your Own Portfolio

1. Tax Loss Harvest

Deadline for 2013: Tuesday, December 31, 2013.

Do you have losing securities in your portfolio? As we wrote in 4 Money Must-Dos, if you’ve sold some of your stocks this year – or own mutual funds that have sold stock – you may have the opportunity to offset gains by selling depreciated securities.  Realizing your losses may make more sense more than ever, given the recent increase in the capital gains tax rate.  If your net losses exceed net gains, you can actually write off the losses (up to $3,000) against taxable income.

Before you rush to make a sale before the end of the year, heed these two cautionary notes.  First, if you plan to repurchase the same, or substantially identical, security within 30 days before or after selling at a loss, your trade may be deemed a “wash sale.” If so, your loss may be deferred until the new security is sold.  Second, if you’re switching between two very similar securities – say two ETFs that track the same index – by reaping losses now, you lower your tax basis.  So when you eventually sell, you’ll have to pay more taxes.

2. Max Out Your Retirement Accounts

Deadline for 2013: Tuesday, April 15, 2014 for IRAs, Tuesday December 31, 2013 for 401ks.

Have you maxed out your contributions to your retirement accounts for this year?  Check out the table in our recent blog post about retirement accounts to see what the 2013 contribution limits are for 401ks and IRAs.   The good news: the deadline for contributions for IRAs is not until April 15of next year.  For 401ks, the boat may have already sailed, as typically funds are withheld from your paycheck.

The reason it’s a good idea to max out your retirement accounts is simple: they are tax-advantaged.  In traditional retirement accounts, the two tax advantages are 1) you don’t pay taxes on that income now (i.e., your taxable income is lower) and 2) your investments grow tax-free.  You don’t pay any taxes until you withdraw funds at retirement.   (NB: That’s why it’s a good idea to put income-generating assets in your retirement accounts).

In Roth retirement accounts, while you pay taxes now on your income, you still enjoy the following two tax advantages: 1) your investments grow tax-free and 2) you don’t pay tax when you withdraw. If your retirement account is employer-sponsored, like a 401k, it’s likely to come with an “employee match” – meaning you get free money.  According to the Plan Sponsor Council of America (2012), over 95% of companies that offer 401ks have a match feature.  So if you’re prioritizing where to put retirement dollars, start with your 401k.

3. Convert to Roth Today and Save on Tax Tomorrow

Deadline for 2013: Tuesday, December 31, 2013.

Do you anticipate being in a higher tax bracket in retirement?  If so, it may be time to convert your IRA to a Roth.  Since 2010, this opportunity is also available to higher earners too, as income limits for IRA contributions expired.  In our recent blog post about “going Roth”, we’ve written up a framework that may help you make the Roth decision.

It may also be time to convert your 401k to a Roth.  Since 2006, employers have introduced Roth options to 401ks and now nearly 50% of companies offer a Roth option.  Check with your employer if you can convert to a Roth.  In some cases, you may be able to fine-tune your tax-planning by converting a portion of your 401k (or IRA) to Roth.

A word of caution: conversions are typically a one way street and come with a tax bill now that you’ll need cash to pay for.  Before deciding to convert, make sure you have the funds to cover the tax liability you’ll incur today.

4. Don’t Miss Out on Other Work-Place Tax Benefits

Deadline for 2013: Tuesday, December 31, 2013.

Employers offer you other ways to save on taxes besides retirement in what are known as flexible spending accounts (FSAs) and health savings accounts (HSAs).

In FSAs, you set aside earnings pre-tax to pay for what’s known as “qualified expenses.”  The two most popular genres of FSAs are healthcare (in which out-of-pocket expenses such as co-pay, deductible or certain over-the-counter medications are considered qualified) and transit (where your garage or public transportation bills are qualified).  Each FSA is subject to contribution limits; for healthcare FSAs, pursuant to the Affordable Care Act, that’s $2,500. Also, you need to decide in advance – typically before the end of the year, or during open enrollment period – how much money to deduct from your paycheck for these accounts to cover any qualified expenses that you anticipate for 2014. An extra tip: although you lose any money that you don’t use, some employers offer you the option to roll over $500 to the next year.  Meaning: there’s little reason not to do $500.  Check with your HR today to see if you can enroll today.

HSAs are the other key way to save on taxes for medical spending. A healthcare savings account is a trust that you are eligible to set up if you’re in a high deductible health plan.   You contribute to your HSA with pre-tax dollars that you may draw from (tax-free) to pay for qualified medical expenses.  Relative to a FSAs, HSAs offer two main perks.  First, the funds may be invested (and grow tax-free) and second, they remain in your account from year to year until you use them.  To create an HSA, double check with HR to see whether you’re eligible and if your employer offers both, because it may limit the expenses that are qualified in either program.

For Your Loved Ones

1. Gifting Appreciated Securities

Deadline for 2013: Tuesday, December 31, 2013.

If you’d like to donate to your favorite charity, consider donating appreciated securities. Not only will you be giving to a worthy cause, you’ll receive a tax deduction based on the security’s fair market value.  If you’ve held the securities for longer than a year, you also avoid paying capital gains tax. Plus, unlike with tax-loss harvesting, you can buy the same security immediately and enjoy the higher adjusted cost basis.

The same goes for gifts; you can avoid paying capital gains on appreciated securities by gifting them.  Note that the IRS allows you to make non-taxable gifts of $14,000 to any individual per year, and up to $5,250,000 over your lifetime.  Further, it makes the most sense if the recipient is in a lower tax bracket, as the recipient gets the original cost basis (the only time the step-up basis comes into play is when the investments are inherited).

2. College Savings with 529s

Deadline for 2013: n/a.

If your son or daughter is planning to attend college one day, you can lend them a helping hand – and lower your tax bill – by setting up a 529.  529s are state-sponsored plans used for saving towards college education. Earnings and withdrawals of the investments in 529 plans are not subject to federal tax, and in some cases, state taxes.  (NB: there are some states, like California and Massachusetts, that don’t offer any benefits).   Because 529 contributions are not tax-deductible, the idea of a deadline is not relevant.

If your child decides not to attend college, the funds can be transferred to another qualified beneficiary. However, if you don’t know another beneficiary, you’ll incur a 10% penalty tax and regular tax rates will apply on capital gains.


Tax-time may seem overwhelming – and far off.  But year-end is an important time to take steps to make sure you’re not paying any unnecessary taxes.

If you’ve made it this far in the post, you’ll note that a major theme is lowering your taxable income.  This becomes particularly important if you’re on the cusp of different tax brackets – and lowering your adjusted income means you’re in a lower bracket.  Doing a dry-run of your tax-returns using tax-prep software or paying a visit to your accountant should be your next step.  Then, you can make an informed decision about whether any of the above makes sense for you.

Our next post is about New Year’s Resolutions.  For one: put some time on your calendar in early December to deal with year-end tax questions!

Photo credit: 401(K) 2013

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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