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Year-end Planning Tips


Well, the year is running out, but there is still time to make some moves to improve your financial situation. This column is about changes, so let's begin at home.

What has changed for you? Have you retired? Changed jobs? Started a family? If any of these changes have occurred (you don't have to look to make changes), you've got to deal with them. However, if nothing major has changed in your situation, you might want to consider the following.

Tax harvesting is an old standby, and, with this year's hefty run-up in the stock market, it might be an area to investigate. According to Investopedia, "For many investors, tax gain/loss harvesting is the single most important tool for reducing taxes now and in the future. If properly applied, it can save you taxes and help you diversify your portfolio in ways you may not have considered. Although it can't restore your losses, it can certainly soften the blow. For example, a loss in the value of Security A could be sold to offset the increase in value of Security B, thus eliminating the capital gains tax liability of Security B."

The basic mechanics say that a taxpayer can deduct $3,000 of capital losses in excess of capital gains per year. Any other losses can be carried forward to offset capital gains in the future. This is a tricky area of tax accounting, so if you're not up to it yourself, be sure to get some help.

The next question is: Do you itemize deductions? If you do, there is a plethora of goodies available to you. Do you have a mortgage? If so, your interest is deductible. Do you have student loans? If you do, the interest is deductible in the "adjustments to income" section of the 1040 form. You can deduct student loan interest on loans issued for yourself, your spouse (if you file jointly) and for your dependents.

How about converting your traditional IRA to a Roth? This is a complicated calculation because it is based on the "time value of money," interest and earning rates, as well as present and future tax situations and most of all, human nature.

As the old bluesman croons, "Everybody wants to go to heaven. But nobody wants to die." Similarly, when it comes to Roth conversions, very few people want to pay the upfront taxes to enjoy lower or no taxes in the future. However, it may be worth a look.

Back to the present. How about your 401(k), 403 (b) or your 457 contributions? Contribution limits are $17,500 this year, and you can add an additional $5,500 if you're over age 50. If you can do this in November and December, it will lower your taxable income for 2013. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits.

And, here's something right from the IRS website about the extension of the American Opportunity Tax Credit (don't you love those names?).

Update May 31, 2013: This page has been updated to reflect the fact that the American Opportunity Tax Credit, which was to expire at the end of 2012, was extended through December 2017 by the American Taxpayer Relief Act of 2012.

Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify for the American Opportunity Tax Credit to help pay for college expenses.

The American Opportunity Tax Credit modifies the existing Hope Credit. The AOTC makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals, whose modified adjusted gross income is $80,000 or less, and $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. The content was featured in Randy's column in The Ridgewood News on October 25, 2013. Click here: http://www.northjersey.com/news/business/229205541_Neumann__Some_year-end_financial_planning.html?page=all

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