Ah, the holidays. The season of spirited tax avoidance and homey deductions, when thoughts naturally drift to capital-loss harvesting and full or partial Roth conversions.
Well, perhaps not everyone thinks this way. The end of the year may be a busy time of gathering and celebrating, but financial advisors say it's also a crucial period for tax planning when a few low-stress and timely moves could end up paying off come April 15.
"Are there things you can do now before the end of the year? Absolutely, and they can save you many, many, many dollars," said Richard Jones, managing director at Merrill Lynch private banking investment group in Los Angeles, which advises 90 ultra-wealthy families with a combined $16 billion in assets.
With his help and that of financial advisors from around the country, here are a few tax-related and other financial planning ideas that should be on the minds of most families this time of year.
Ponder the future: Before making any move in particular, it's important to have a general sense of what kind of income year to expect in 2015 compared with the current year.
Elizabeth Buffardi, a planner in Oak Brook, Ill., recommended a formal tax projection, which takes projected income and expenses and tries to figure out what tax you may owe or what refund you might expect. "The better the input, the better the answer you are going to get," she said.
But even a quick, informal look ahead is useful.
The most common foreseeable fluctuations come with a spouse taking time off to care for a child or return to school, said Robert Schmansky, a Livonia, Mich., advisor.
"These are great years to generate income," he said. Typical steps would be to take gains on appreciated stocks and mutual funds in taxable accounts.
Squirrel away income: If you have a 401(k) plan, now is the time to put as much in as possible — up to a maximum of $17,500 for employees in conventional plans.
Taxpayers can generally stash up to $5,500 a year, or $6,500 for those older than 55, in an individual retirement account, and they can put $3,300 in a Health Savings Account, or more for families and those over 55. Those steps don't have to be done by the end of the year, but might be done as part of year-end tax planning.
If the future looks to be more prosperous than the present, Owen Murray, a Houston planner, said taxpayers should consider converting all or part of a conventional IRA, in which contributions are made before taxes and distributions are taxed during retirement, to a Roth IRA, in which contributions come from after-tax funds but in which distributions are tax-free.
Murray said a client who recently retired with little income but a large conventional IRA was able to transfer $30,000 to a Roth IRA, reaping future tax savings at no tax cost now. But that works only for those with very low incomes; otherwise, withdrawals from IRAs would be taxable.
Bundle expenses: Some deductions have higher hurdles than others. Unreimbursed medical and dental expenses for 2014, for instance, must exceed 10% of adjusted gross income before deductions are allowed, a tax provision that makes them applicable mostly for lower-income households.
Laurence Montello, a Palm Beach Gardens, Fla., planner, said taxpayers should be sure to include all medical and dental expenses such as premiums and co-pays and eligible long-term care premiums, as well as medical expenses for dependents.
Also, now would be the time to schedule elective medical expenses for the end of the year if you expect to clear the 10% hurdle in 2014. To squeeze a slightly bigger mortgage-interest deduction, Christopher K. Winn, a planner in Beaverton, Ore., recommends making a January 2015 mortgage payment before the end of the year.
Spend it: One overlooked trap door in so-called flexible spending plans offered in many workplaces is use-it-or-lose-it restrictions. Flexible spending accounts let you sock away money pretax to pay for certain medical and dependent care expenses tax-free.
If you contribute the current maximum of $2,550 to a health account, you'll need to spend it this year, unless your employer allows a 21/2-month grace period or a provision that allows $500 to be carried over. Companies can't offer both.
The pretax stash can't be used as part of the 10% threshold in deductions for health expenses. That's another reason to get that new pair of glasses or take care of some other medical need you've been putting off.
Reap losses: The end of the year offers a last chance to offset a big looming tax bill by realizing paper losses from assets such as stocks, mutual funds and property. "You can never go wrong harvesting losses in taxable accounts," said Stanley F. Ehrlich, an advisor in Westfield, N.J.
Check the fine print, of course. Internal Revenue Service rules, for instance, say capital losses can offset only up to $3,000 in income, and then only if there are no capital gains.
But in a big capital gain year, it's often wise to use losses as an offset. And there are wrinkles that can add to the benefits.
Merrill Lynch's Jones said that when selling depreciated securities, his group often simultaneously buys assets from the same sector, like a sector-specific exchange traded fund, often at the lower prevailing price.
IRS rules preclude immediately buying the same asset when declaring a capital loss, but allow the purchase of similar assets. This way, the loss is realized, while "keeping the basic integrity of the portfolio."
Another wrinkle: If selling is impossible because the value of the asset has dropped to zero — as in a bankruptcy — it's still possible to claim the loss if you can prove the asset is actually worthless.
Give wisely: Although many take advantage of the deduction for contributions to qualified charities — up to 20% of gross income, when limitations set in — Montello said giving appreciated securities instead of cash provides more benefits.
It allows taxpayers to make a charitable donation, receive a full tax deduction for the fair market value of the appreciated securities, and preserve valuable cash flow. As an added benefit to the charitable organization, any appreciation of the securities remains untaxed forever.
Another option, suggests Michele Clark, a Chesterfield, Mo., planner, might be to make the contribution into a so-called Donor Advised Fund, offered by many financial institutions, that can provide a big deduction for the current year but allow the actual donations to be made to multiple charities and staggered over several years.