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Moves prior to Dec. 31 can make difference in tax bill

12/19/13 | By Chip Gordy, MBA, CRPC

A take-off on the old adage “significant savings can often be had to those who ‘don’t wait’” states the case with year-end tax planning. A few smart moves prior to Dec. 31 can make a significant difference in your April tax bill. The key for most of us will be to defer income and accelerate deductions.

Some common income deferrals include: delay year-end bonus, compensation, payments for service, and rents; postpone retirement plan distributions (that aren’t required), or hold off on the sale of capital gain property until after Jan. 1 (or possibly opt for installment payments instead).

Investors want to be watchful of a few of the following points as well.

New mutual fund investments may be best delayed until after year-end distributions have been made. This is because distributions are blindly made to an owner on a given date of record without regard to how long the investment was owned.

Offsetting realized gains with losses can help as well, so long as the sales do not cause adverse investment results. Keep in mind the 30-day “wash sale” rules that I mentioned a few weeks back. Also, up to $3,000 of investment tax loss can be applied against income from other sources.

Charitable IRA’s: Those over age 70½, who are faced with taking Required Minimum Distributions (RMD) from their IRA, can opt to have up to $100,000 of the balance contributed to the charities of their choice directly. By doing so, they can satisfy their RMD and may come out ahead tax-wise.

Also, in select situations, it can be beneficial to have some or all of a traditional IRA converted to a Roth. When considering this, the upfront tax cost must be weighed carefully against the longer term benefit that a “tax-free” Roth can provide.

For self-employed professionals and small business owners, recent legislation makes it advisable to re-uate your retirement plan structure. As an example, a self-employed individual with $100,000 of net profit could only fund $18,587 to her SEP IRA, but was able to fund $35,087 ($40,587 if over 50) to a one person 401k.In some cases, the difference could result in an additional tax savings of almost $10,000.

For some, it may be even more advantageous to consider a defined benefit pension plan. Another self-employed client in his late 50’s, who was able to make a $220,000 deductible contribution based on his $400,000 salary. This is expected to generate a tax savings of $100,000. Certainly, much depends on the circumstances, such as the owner’s age, income history and whether other employees were involved.

There are a myriad of other year-end tax savings tips. Don’t forget; for those in the higher tax brackets, $1,000 in additional tax deduction may result in almost $400 in actual tax savings. Awareness and acting prior to year-end are the keys to effective tax planning.

As always, it’s recommended that you seek expert financial and/or tax advice before you decide to use any of the above strategies.

– Chip Gordy, MBA, CRPC is a Financial Advisor with Coastal Wealth Management, LLC, 10441 Racetrack Rd, Unit 1, Berlin, Md., 21811 and specializes in Wealth and Retirement Planning. He can be reached at 410-208-4545 or chip@coastalwealtmgmt.com. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Coastal Wealth Management LLC & Cambridge are not affiliated.

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