Maximizing Year-End Tax Opportunities

hi everyone I'm Rosemary Miller here with Kelly Phillips herb a senior writer here at Forbes here to give us some end of the year tax tips thank you so much for joining me today Kelly thank you for having me absolutely so Kelly how can individuals strategically utilize retirement and related accounts to defer income and contribute to their nest EG before the approaching year end so you have the opportunity to put money away all year long um but there are limits on how much you can give and we actually have those outlined in our um our yearend tax article that's coming up but also you can find it anywhere on Forbes or IRS the the the it depends on the kind of account that you have but typically you're looking at about 22,000 for a retirement account that's like a qualified plan like you'd think of as a 401k I'm in about 6,000 for an IRA um and if at the end of the year you haven't hit those limits uh the IRS say time right so if you're looking and you have a little bit of money maybe you got a Bonus or you have a little bit of money you weren't counting on you can actually put that money in one of these tax deferred accounts and what that does is it also defers the tax depending on the kind of account um I will say there's rths are treated differently than uh traditional accounts but for the most part I think um you know with traditional accounts is what a lot of people think about the traditional IRA when you put the money in it uh doesn't get taxed when you make the contribution it gets taxed later when you take it out and of course the goal is that you'll you're making more money now than you will when you're in retirement so your tax bracket will be a little lower later so you have the the benefit of the deferral now and then hopefully the benefit of a lower tax prit later and you can keep making contributions up into the year except when it comes to IAS you even have an extra wiggle room which is that you can literally make it that kind with respect to 401ks your deadline is a hard deadline at the end of the year but if you're a super procrastinator and you have an IRA you have a little more wiggle room because those contributions can be made all the way up to tax day which is April 15 and it will still count for the prior year well Kelly let's talk about charitable contributions so in what ways can make Gain charitable contributions including rollovers and donations to donor advis funds serve as a means to reduce income while simultaneously contributing to a charitable cost so there's a lot of ways that you can give to charity which is pretty pretty awesome that have some um great tax benefits uh the one way that most of us think about is just writing a check or um you know making a credit card donation um as long as you make those by year end you are eligible assuming that you automize you're eligible to deduct those on your taxes for 2023 um and a lot of times people wonder does the check have to clear have you do you have to have paid off the credit card no you just have to have made the uh the gift by the year end which is um a pretty good a good idea especially if it's end of the year and you're kind of scrambling right um there's other ways that you can can give and you mentioned uh Donor advised uh gifts and so what's really interesting about Donor advised gifts or Donor advised funds is that they are sponsored by a charity but it is usually in a financial institution so for example Fidelity might have a donor advice fund and so what a donor advice fund does is it allows you to make a contribution today even if you're not really sure where you want the money to go so let's say you know you want to spend $10,000 you want to make a $10,000 gift to charity but you're not really sure where you can put it in this fund you get the immediate tax deduction now and then later you can tell Fidelity you know what I really feel strongly about sending this money to Red Cross or or the charity of your choice um you can't make them do it but your suggestion and and typically as long as it's qualified charity they'll then make that contribution and so you get the benefit of having made the donation to the fund early by year end um but you might can take your time a little bit to figure out you know how how where do I want this money to go how do I want to benefit charity so that's a really good way donor advice funds is worth noting do tend to be at a little bit of a higher price point right so you could write a check to charity for any amount $5 um but donor advice funds are going to have minimum so they are you know a little more strategic um High net worth planning but still a really good option uh another thing that you can do is donate appreciated assets um I think sometimes people get a little freaked out when they hear like appriciated assets because it sounds like it has to be like super wealthy but not necessarily um I happened to buy Amazon back in the day before it became well it was Amazon then but now it's Amazon right so it's appreciated um I've never sold it it's sitting in my it's sitting in my brokerage account um if I were to sell it I would pay capital gains on it and then I could write a check to charity for the difference which would be a smaller check but if I just transferred that money over to the charity directly so if I donated the appreciated asset I don't pay the capital gains and I get the benefit of the entire value of the deduction so it's a win for me and it's a win for charity so um those are two ways that are really good and then the third one that's worth mentioning is that if you're a little older um you can make what's called a qcd which is a qualified charitable distribution and that is a rollover directly from your retirement accounts we mentioned those earlier but when you get older you're required to start taking that money out and uh at age 73 it's called a required minimum distribution and if you don't take a certain amount of money out the IRS dings you um much like with the appreciated assets if you take the money out it becomes taxable if you then write a check to charity you're giving them the after tax value of that gift but you can use this very specific rule to donate up to $100,000 directly from your retirement account to the charity it's treated like a rollover if you've ever done a a regular rollover and the benefit is you get the full value of the deduction it can count as your rmd so you check those boxes and the charity gets the full value of that um gift the best thing about qcds that I don't think gets talked about enough is I mentioned um earlier that you had to itemize to take charitable gifts uh to get the deduction qcbs are never taken into income so there's no offsetting deduction it's like it's sort of Never Happened from a tax perspective you're literally moving money it ticks all the boxes but you don't get taxed on it and you don't get a deduction for it it's just considered tax-free that's a really terrific uh thing to have happen but it also means that you don't have to meet any sort of itemization uh threshold which sometimes can be difficult for folks in a post uh 2017 tax reform World um there it's sometimes difficult for some taxpayers to kind of hit those thresholds well Kelly uh could you discuss the benefits of harvesting losses in balancing out income particularly in a scenario where there have been significant stock gains throughout the year right so it's funny when you talk about harvesting losses it sounds really dramatic um but basically what it is is it's just a way of balancing out your portfolio so let's say you had a lot of winners over the year um and so you're looking at you maybe you've actually sold some winners uh things were going well from you uh for you and you went ahead and relives capital gains those are going to be taxables uh tax sorry those are going to be taxable but if you have losers in too if you sell them and you have losses those realized losses can offset the realized gains the important part is you actually have to make the sales because what's inside your account sort of like what I I was talking about with Amazon before if something is appreciated that in itself isn't a taxable event it's not taxable typically until you sell it or give it away um in this instance if you've sold throughout the year and you've wrapped up some realiz it's good to offset it with some losses and the flip side is also true if you you know is a rough tax year or sorry a rough accounting you're looking at your portfolio and you had a lot of losses maybe it's time to you know bounce those out with selling if you win or um while you can carry some losses forward it's always a good idea to try to reach some balance and so could you explain some of the advantages of participating in an intf family loan referring to the Grandma's story which we also have a video about that you all should watch it uh and how it enables individuals to reduce interest rates while maintaining Associated tax breaks a lot of folks will tell you that you shouldn't borrow money from family but this is actually one instance where you can actually have tax advantages as well as economic advantages from borrowing family why interest rates have been slight as many of us know some folks now have high credit card bills um student loan payments that re you know kicked back in and some of those are at higher rates than maybe seems affordable for for uh students who just graduated um and you know you might have people who are looking buy a home or to refinance a home and interest rates are just maybe a little too high for them to do that right now uh but if you have a relative who has some liquid assets you know maybe they have uh you know a little Nest Egg sitting over in in a bank somewhere then they're willing to give you loan um there's a special kind of intf family loan where the IRS says as long as you hit certain minimums with the interest rates then we're going to consider this a Bonafide loan so it has to you have to hit What's called the AFR it's a very specific number um that the IRS puts out every well treasury puts out every single month but as long as you hit those numbers the IRS says okay we're going to consider this a real loan now some of sometimes the spread between what that number is and what you're paying can be significant if you're paying 30% on a credit card and the AFR is 5% you know big big difference same thing with the mortgage if you're looking at a mortgage rate of eight or nine and you can pay 5% on the AFR it's a terrific opportunity for you and it feels because it tends to be more informal right if you're borrowing from your parents let's say it feels like it wouldn't be like a Bonafide loan for purposes of IRS but it is and theage to that on the part on the part of the borrower is that um you can still keep the same tax treatment that the loan would have had from a bank even if it's from Mom and Dad so a good example again with a home if I borrow from my parents a a proper mortgage like we might write a promisory note they might even record it and the county where I live um if I do that I can still claim a mortgage interest deduction for the interest that I'm paying to Mom and Dad even though I might be getting a more favorable rate from that bank than I would say my local bank um and it's a really nice way to preserve uh those tax advantages while paying less money on the flip side the person who's loaned you the money does have to bring that money into income as interest but you know it's probably more more the same amount that they would have been uh earning had they kept that money in like a CD so there's really no difference to them um this works really well actually for middle class taxpayers it works even better um High income years because there's a lot of associated estate tax um advantages that that can also come into play um that really aren't part of the year-end discussion but it is a way if you have a lot of money or parents have a lot of money you know it might be a discussion you want to have with your advisers but if you're just looking to have help paying off some student loans and you need um you know just a Cas borrowed at a better rate than you would get at a bank uh family is actually a really good place to start it is worth noting that you want to make sure that you have a really good relationship with your family um before you either make that ask or say Yes um because you do want to still treat it like it's a business deal and you know if there's a situation where you're not really communicating with your parents or uh you know maybe you don't trust your uncle I'm probably not the best thing to borrow or lend uh money Kelly I don't know why but I feel like you're letting me in on like top secrets or something like o everybody does not know this because I think that's one that people don't talk about he always think additional lending but you know there are especially now there are people who retired folks for example that have money that they might be able to lend to their favorite grandchild wow so let's talk about Electric Vehicles how do investments in electric vehicles and green home initiatives offer tax benefits at both the state and federal levels and what considerations should be made regarding the new upfront payment scheme for electric vehicles so EVS are really interesting because uh electric vehicles EVS are really interesting because there's a lot of tax incentives uh to get folks to buy them and actually in some cases there are more um opportunities to buy them than actual cars to buy um but one of the things that the feds have done in particular and states are now following suit is that they're offering you a tax credit to buy green so you can earn up to $7,500 in credit which is a whole lot because to make a quintion a deduction is a deduction in your income so it's a dollar Ford dooll deduction in income credits are a dollar for dooll offset on the tax due so that's a much bigger savings right because that is you kind of figure it out according to your tax bracket so it can be a pretty pretty significant savings so you can get this credit of up to $7,500 for buying a new EV um there are a lot of rules far too many rules to talk about in this short span of time um but a couple that you should be aware of is that um they keep well the one that you should be most aware of is that they keep changing the rules um there are actually requirements depending on when you buy the car um that there must be uh certain amount of the car produced in with America there are certain kinds of efficiencies that you have to prove so you want to do your homework um and you also need to be aware of when you can claim the can only claim the credit when the car is delivered so if you go down to your lot today uh car lot today and you can you know pick up the the EV of your choice and they have it on the lot then you could probably make that a year in tax move however if they tell you it's backordered and you're not going to be able to get it to 2025 um then you're not going to be able to claim the credit until 2025 so you want to when you're out there poking around make sure you check that the time so there's an additional incentive as of January 1 of next year which allows you to get the credit on site at the dealer so basically it acts like an advance or like a discount against the car payment um and again if you start looking at those numbers $7,500 is a pretty hefty uh credit or discount to be able to take at the dealer um so if you want the credit now you know it's a year and move if you want to wait and try to get it upfront of the dealer um you know go on January first with respect to homes there's a lot of different kinds of credits and many of them have been around for a while it's exactly the kinds of things that you would think things like buying an efficient uh central air conditioner investing in solar all of those kinds of things that were sort of touting as good for the environment they may also be good for your wallet um because you can depending on on again most of them have to be installed uh by the end of the year for you to get the credit um but you know if you're looking at a new heat pump uh you know maybe that's your Christmas gift because you can offset that with a credit up to 30% um to the cost of that piece of equipment which can be pretty significant now depending on which kind of credit you qualify for so it depends on the thing like which thing you're getting is it roofing tiles versus something else um there could be a limit an annual limit but in either case there's no maximum credit so most of the time you could keep uh for sorry there's no maximum lifetime credit so you could do this every year right so you can start looking now and maybe invest in the air conditioner this year and the heat PP next year well Kelly what states what what steps excuse me should individuals take to assess their current financial situation before the year end and how might this evaluation guide decisions such as catching up on estimated payments or making changes in the upcoming year right so this is the point where I tell you that you should have been doing this all along um but it's also the point where I tell where I tell taxpayers that I know that they haven't and that's okay um you know there's no shame in it like again ideally you'd already have a good picture of your finances by now and I've taken all the right steps but literally if you're looking at your year in statement you're like what happened this year it's been a blur I don't know um you know maybe take a few hours out of your day um I ideally again you'd meet with your tax professional but if this is something you'd want to do on your own there are tools available to help you do that um look at is my picture the same as it was last year if it is did I withhold the same amount this year as I did last year and that should give you a pretty good indication of what your tax bill is going to be in April if you got a big bump in salary um but didn't make any changes maybe consider putting a little more money in um via either an estimated payment or you can actually just ask your employer at the end of the year to increase your withholding just a little bit um there are a lot of ways where you can measure again usually against last year's tax returns just look at your last year in uh check the check that you've received you know usually it'll tell you how much you've had taken out year-to date but since it's the end of the year it's going to be pretty close to what happened last year right hopefully um so you can look at those numbers see if they match see if there's anything else you need to do um if you find that you're going to owe a little more tax you can either as I mentioned um make an extra payment now or you can do some of the things we've talked about like make a charitable contribution consider deferring extra income through a a charitable sorry through a retirement contribution there's lots of ways that you can uh reduce your taxable income again ideally you'd be doing it all during the year but if you are sort of feeling the scramble at the end um there's lots of resources to help you one of them I think I want to mention for sure is that there is a withholding calculator on the IRS website it's irs.gov um and it can actually it sort of walks you through and asks you some questions you can figure out if you've been making the right withholdings um I think most people are pretty confused by their uh Forum W4 you would fill out when you uh start your job so this is a way for you to you know check against what the IRS thinks you're going to owe that you are kind of keeping in line another way I know uh Bill Baldwin's a fan of you can use ta software just run a demo see what you think's going to happen um you don't have to have perfect numbers right you can say I think I made this amount this year just run the numbers and see what it looks like and if it's in keeping with what happened last year again you're probably okay if it's significantly different you want to make a change so are there any specific deadlines or extensions for retirement and related accounts that individuals should be aware of as they approach tax day allowing for last minute contributions right so earlier I discussed the retirement contributions for retirement accounts like a 401k those are definitely yearend but again if you are making a contribution to something like an IRA you have until tax day which is April 15 so a little more wiggle room but if you are if you are looking to make that retirement contribution this year you want to make sure that it's in by December 31st okay and considering all the strategies you've mentioned what key factor should individuals consider when deciding whether to catch up on estimated payments or Implement changes in their financial plan for the New Year again I think when you start thinking about next year you want to do exactly the same thing that I just said to do for the year end right look at what you have um what you're expecting to come in and what happened last year and see if you think those things are going to be the same if you know that there's something that's going to be significantly different in your life you're going to want to plan accordingly and while we always don't know what's going to happen there's some things you can be pretty sure about right like if you're getting married next year um you know hopefully you know that hopefully you know that now um having a baby buying a house moving all of these things that can have an impact on your taxes you probably know now if you're going to be doing that next year or that you're thinking s you know seriously about doing those things and you can make some changes same thing with jobs if you are getting a raise if you are changing jobs especially if you're shifting into maybe more than one job you're thinking about picking up a side Hustle um those are things that would impact your next year's planning and you want to start thinking about it now so that next year we don't have the same conversation about how to scramble at the end not that I'm downplaying scrambling at the end it can be advantageous and I'm a profess anator too I get it um but the more that you can plan ahead the more likely it is that you can save Kelly this has been so helpful thank you so much for joining me today thank you absolutely

Channel: Forbes

Views: 2,073

Keywords: Forbes, Forbes Media, Forbes Magazine, Forbes Digital, Business, Finance, Entrepreneurship, Technology, Investing, Personal Finance, tax time, tax tips forbes, tax season, tax advice 2024, how should i do my taxes, taxes for personal, taxes for business, tax help, Tax Girl, Kelly Phillips Erb, how to do my taxes

Id: vHv7rAejCSE

Length: 22min 5sec (1325 seconds)

Published: Sun Dec 17 2023