THREE
WEEKS LEFT FOR TAX & FINANCIAL MOVES
Although
December is a busy period with holiday shopping and parties, this is a pivotal
period to make tax and financial decisions.
Here are a few year-end options to consider:
1.
If you sell stock at a gain this year, the
tax on the gain is determined by how long you owned that stock. Short term (one year or less) gains will be
taxed at your ordinary tax rate (normally 25% or more). The tax rate for long term gains (more than
one year) will be taxed at 15% unless you are in a low tax bracket and then it
will be taxed at zero percent.
2.
If you itemize your tax deductions, you may
decide to donate some of your clothing and household goods to charities on or
before December 31st. Most
taxpayers are in the 25% marginal tax bracket or higher, so a $400 charity
donation results in an extra $100 in tax refunds. Make
sure you obtain a tax receipt from the charity in case you are audited.
3.
If you have children, grandchildren, or other
relatives that you want to help with their future college plans, you should
consider the College 529 Plan. There are
two college plans in Maryland. The
Maryland Prepaid College Trust allows families to lock in payments at Maryland’s
public colleges. There are some
restrictions with this plan, so you should research this plan carefully to
determine if it meets your needs.
The
other College 529 plan, the College Investment Plan, is the more popular
plan. In Maryland, a taxpayer can open
this plan for a beneficiary and contribute up to $2,500 per year per person. This $2,500 contribution can be deducted on your
Maryland’s tax return and will result in about $400 on your state refund for
most taxpayers. The state of Maryland
has contracted with T. Rowe Price to manage the funds for this 529 Plan and
there are several portfolios to choose from.
Most states have tax deductions for their 529 plans as well.
4.
Since the stock market has done so well in
2013, it’s difficult to predict how much further it can grow in 2014. However, the latest government statistics
show that GDP growth was up last quarter to the highest level in years and the unemployment
rate dropped to 7.0% in November, which is the lowers number in years. So the economic figures look good at this
point.
Regardless
of the Dow Jones performance, my advice is that all taxpayers take advantage of
IRAs, 401Ks, and TSPs because the federal and state tax benefits results in
tremendous tax breaks. For example, a
$1,000 contribution will only cost you $670 after tax breaks. So, my
recommendation is to contribute as much as your employer’s matching
contribution as a minimum. If you can
afford to contribute more, the maximum contribution is $17,500 for those under
age 50 or $23,000 for those 50 and over.
