Year-end financial planning


Although the ups and downs of the financial markets get considerable attention, personal financial planning involves much more than just managing investments. While we always preach the value of maintaining a well-grounded long term perspective, it is also worthwhile to consider short term tactics that can boost one’s bottom line. Our year-end financial planning not only aims to identify actions that should be taken prior to December 31st, but also those that should be postponed until next year.

While we always preach the value of maintaining a well-grounded long term perspective, it is also worthwhile to consider short term tactics that can boost one’s bottom line.

The cornerstone of this type of financial planning is a comparison of what the result would be if an action was taken in 2013 against the probable outcome from waiting until 2014 to take that same action. In many cases, the tax consequences drive the decision. It is our aim to save a client taxes by evaluating what income streams and deductions they can control and choosing the best year in which to incur the income or make the deductible payments. What follows is a brief summary of some of these opportunities.

Controllable income:

Withdrawals from retirement accounts: At age 70 ½, Required Minimum Distributions must be taken from retirement accounts. In some cases, it is wise to take additional funds beyond the minimum if it is needed or will soon be needed. This allows the extra withdrawal to be taxed at a lower rate than it would be if taken later.

Those age 59 ½ are no longer subject to a 10% early withdrawal penalty and are free to take as little or as much as they wish from their retirement accounts. If at any time during the next 11 years (until age 70 ½) there is room to incur more taxable income within a lower tax bracket, withdrawing funds even if they are not needed for spending can be beneficial.

If funds withdrawn from retirement accounts are not needed for spending, converting the amounts withdrawn in excess of any RMD to a Roth IRA might be a good idea. Roth’s grow tax free, withdrawals are tax free, and Roth accounts are not subject to RMDs while the owner is alive.

Capital Gains: When you sell capital assets like stocks or mutual funds that have been held for 12 months or more for a profit, they are taxed as a long term capital gains. For all taxpayers, the rate applied to long term capital gains is lower than the rate applied to ordinary income. In fact, clients in the 15% or lower tax brackets pay zero taxes on long term capital gains.

Stock options: Clients with stock options are often well served by considering what year to exercise these options to get the best after tax result.

Controllable expenses:

Charitable contributions: Charitable gifts can be tax deductible. If one gives shares of investments that have appreciated, the potential capital gains are erased. Clients over 70 ½ can give to charity directly from their IRA’s positions. Called Qualified Charitable Distributions (QCD), these actually count toward a RMD and are particularly beneficial to non-itemizers. Though popular, this provision is set to expire at the end of 2013.

Capital Losses: Selling investments that have declined in value from the time of purchase can lower taxes by offsetting gains. If the loss exceeds the gain, up to $3,000 can be deducted from income and any excess beyond that is carried forward to offset future gains or income.

Itemized Deductions: As December 31st approaches, a number of tax deductible expenses can be accelerated so they all apply to 2013 or postponed to apply in 2014. This can reduce taxes in a higher tax year or allow a family to itemize when they wouldn’t have been able to do so had they not “bunched” their deductions.

For instance, a family that would normally use the standard deduction in 2013 could postpone their year-end charitable donations, property tax payment, and perhaps some medical expenses until after December 31st. They would make their usual year-end donations and property tax payment for 2014 at the usual time late in 2014. Now they have double the charitable donations, twice the real estate taxes and the medical expenses all hitting in 2014. They get the same standard deduction for 2013 they would have had they not postponed, but they will itemize in 2014 and therefore deduct more than the standard deduction.

More Considerations:

Employees that have not maximized their contributions to a retirement savings plan like a 401(k) or 403(b) can increase their payroll deduction between now and year-end to increase their tax deductions for 2013.

Families that are interested in gifting to other family members can gift up to $14,000 per person, per calendar year free of gift taxes. These gifts are not income tax deductible but once December 31st passes, the option is gone for 2013.

Of course, the tax code has gotten more complex over the years so financial planning has become more difficult. 2013 saw many changes particularly for higher income taxpayers. Households with income nearing $200,000 face the phase out of exemptions and itemized deductions, a higher capital gain rate, and taxes on certain investment income for 2013 and beyond. If one’s tax withholdings or estimated payments are not sufficient, penalties and interest may be assessed.

Late in the year we have much less uncertainty about what our income and expenses will be because those items are “in the books.” Where needed, we will prepare a tax projection for 2013 to help us be more precise about what maneuvers may benefit each of our client families. We typically start this formal tax projection process in November.

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Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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