PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

6 Common Tax Mistakes To Avoid by Year End

4/10/2014

0 Comments

 
Picture
Q. What are the tax mistakes to avoid by year end?

A. There are a few common mistakes people tend to make that if you avoid them by the end of the yar, you can reduce your tax significantly.

1. Not Contributing to Your 401(k) or 403(b) and/or 457(b)
You ill not build your retirement nest egg, you will not receive any income tax break, and you will not receive any employer match which is free money.


Don't make this mistake! Also, if you are over age 50, additional contributions can be made with the “lifetime catch-up” with a 403(b) and a “double-limit catch-up” with a 457(b). Once you maximize your contribution you cannot make additional contributions to make up for under-contributing in previous years.

2. Not Timing Capital Gains and Losses
Capital gains and losses are classified as either short-term (less than one year) or long-term (more than one year). Long-term losses can only offset long-term gains, and vice versa. Selling investments, like stocks, bonds, or mutual funds you have held for more than one year generates a 0%, 15% or 20% capital gains tax rate (based on your income). Realizing a gain on investments held for less than one year could generate up to 39.6% tax rate (based on your income). On top of the capital gains tax is a 3.8% investment surtax (based on your income). Review your portfolio to maximize your gains and losses and remember losses can be carried forward to future years. 


It's important not to violate "wash sale" rule as you time capital losses.

3. Leaving Money in Your Flexible Spending Account
Many employees take advantage of their employer provided Section 125 pre-tax flexible spending account. Unfortunately, many employees leave large balances in their accounts at year-end instead of spending them down. Balances in excess of $500 at the end of the year or balances not used within two and a half months of the next year (“grace period”) will be forfeited. Make sure you pay your child day care bill, your dentist’s root canal bill and your health insurance deductibles before Dec. 31.

4. Paying the Alternative Minimum Tax
Instead of prepaying your state income taxes and real estate taxes, pay them when they are due. Instead of exercising your incentive stock options early, exercise them when they are closer to their expiration date. Verify your municipal bonds and municipal bond funds holdings are exempt from AMT, as many are not exempt. Each of these measures could eliminate or mitigate your AMT exposure.

5. Forgetting to Take Your Required Minimum Distribution
Also know as RMD, required minimum distributions are necessary on traditional IRA accounts once you turn 70.5 years old (with certain exceptions) or if you inherit an IRA (with exceptions for spouses). If you have a 401k, 403b or 457b from a former employer and you are at least 70.5 years old, RMD applies as well. Forget to take your RMD and you can be subject to a 50% tax penalty.

6. Forgetting to Fund Your 529
For 2013, the maximum contribution per person, per beneficiary, to a 529 higher education savings plan is $14,000. There is a special five-year pull-forward rule, allowing you to contribute $70,000 in a single year, per owner, per beneficiary. Like a 401k, 403b or 457b, once you maximize your contribution you cannot make additional contributions to make up for undercontributing in previous years. Funding your 529 also provides state income tax deductions (depends on your state) and valuable estate planning benefits.


0 Comments



Leave a Reply.

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Powered by Create your own unique website with customizable templates.