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A Message from Kimberly Clouse, Financial Expert:
I have worked in the financial services industry for
nearly a decade in many capacities, most recently as
a financial advisor for individuals. Over the course
of my career, I have had the privilege of working with
a diverse range of people, from the single mother just
starting her own business to the dot.com billionaire.
Based upon my experiences, I have learned that the same
basic principles and lessons apply to a successful and
healthy financial life, whether you're starting out
or cashing out. These guiding principles include simplicity,
a long-term perspective, and above all, knowing that
you have control of your financial destiny, and all
the information you need is well within your reach.
Year-End Money Moves
With less than one month left in calendar year 2000, now
is the time to evaluate your year-end money moves. The tax
year ends on December 31st, so act
now to make the most of the time you have remaining. Consider
the following tips to help minimize your tax burden:
Pay Deductible Expenses Now: The attractiveness of
paying certain deductible expenses before year-end depends
upon whether your tax bracket will increase or decrease next
year. If you expect to be in a higher tax bracket this year
(2000) than next (2001), you might want to pay deductible
expenses before December 31st. On
the other hand, if you expect to fall in a higher tax bracket
in 2001, delay paying some deductible expenses until January
to reduce your 2001 tax burden. Listed below are a few deductible
expenses that you can pay before December 31st,
should you determine that is preferable in your situation:
- State income taxes
- Charitable contributions
- Mortgage payments (Payments due in January can often
be pre-paid in December. These payments include deductible
mortgage interest.)
Maximize 401(k) Contributions: With a 401(k) plan,
you decide what portion of each paycheck you want contributed
to what is essentially a personalized retirement plan, up
to a maximum pre-tax contribution for 2000 of $10,500. Check
with your payroll department to find out if you have reached
your limit this year, and if you can afford it, change your
remaining 2000 contributions to max out your contribution.
Allocating the highest allowable amount benefits you in two
important ways:
- Your 2000 taxable income will be reduced. If you contribute
to a 401(k) plan, federal, state, and local taxes are
withdrawn from your salary after your 401(k) money has
been taken out.
- Your retirement savings are increased. Your 401k contributions
and any earnings grow tax-deferred until retirement, when
you finally pay taxes on your withdrawals. The benefit
of maxing out your 401(k) is even greater if your employer
offers a match: over 80% of employers offer to match a
percentage or set dollar amount of the money that you
put into your 401(k).
Evaluate Your Mutual Fund Investments: Most mutual
funds make taxable capital gains distributions at year-end.
At a minimum, you want to invest any new monies in a mutual
fund after the record date for these distributions. (Call
the mutual fund company or your broker to find out when the
record date is). If mutual fund shares you have already purchased
have declined in value, you may want to consider selling them
now, prior to the fund distributing capital gains. Not only
will your fund have lost money this year, you might also be
faced with a tax bill. Some fund managers sold stocks they
purchased years ago to lock in gains; gains from sales are
allocated to all fund shareholders, even if certain shareholders
have only owned the fund for a day. (Of course, you will not
pay taxes on gains in tax-deferred retirement accounts, such
as IRAs. With those accounts, you are not taxed on any gains
until you withdraw the monies.)
Use Flexible Spending Accounts: Under a flexible spending
account, or Section 125 Plan, employees contribute pre-tax
income to an account to pay for qualifying health care and
dependent care expenses. Typical annual maximum contributions
to flexible spending accounts are $3,000 for health care and
$5,000 for dependent care. Contributions to these accounts
are exempt from federal taxes, and in some cases, state income
taxes. But employees must budget expenses carefully when using
such an account: any monies that are not used by year-end
are forfeited. So find out what your remaining balance is
and spend it to the extent possible. To receive reimbursement
from your account, expenses must be incurred by December 31st,
even though receipts can be submitted next year.
Make Use of the Annual Exclusion: Using the gift tax
annual exclusion, taxpayers are allowed to transfer up to
$10,000 per year per donee without incurring any gift tax
liability. These annual exclusion amounts are not included
in your gross estate for purposes of the estate tax and therefore
are a tax-friendly way to give away money. Consider this example:
Mr. and Mrs. Smith have 5 children and want to reduce the
size of their taxable estate. They can both give each of their
five children $10,000/year (for a total of $20,000 per child),
thereby reducing their taxable estate by $100,000 without
incurring gift tax. In this way, they have transferred $100,000
tax-free which otherwise would have been taxed in the Smiths'
estate at death.
These financial moves may help you reduce your 2000 tax bill,
but time is running short. As always, check with your individual
tax accountant before taking any action since everyone's financial
and tax situation is unique.
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