December Tips for Savings Accounts and Estate Planning

Are you looking to take advantage of any tax breaks available by the end of the year? It’s a good idea if you are positioned correctly.

If you are a W2 employee, there is not much time left for you to augment your 401(k) savings. IRAs allow you to contribute until April 15, but 401(k)s that are covered in an employment plan only allow the employee to contribute until December 31st. Therefore, if you’ve only put in $2,000 for the year, and you make $10,000 a month, you probably won’t have time to max out your 401(k) allocation of $16,500 before the end of December. But now would be a good time to look at maxing out what you can in order to maximize the amount your employer will match.

Some employers require employee contributions of 6% in order to match 3% of the contribution. I would really recommend trying to take advantage of this free money that your employer is offering you (but probably secretly hopes you won’t take advantage of!).

Another end-of-year practice that will be good to take advantage of is charitable donations. You can give up to 50% of your income in donations, but most people (obviously!) can’t afford to do so. But there’s one way to use donations that not enough people take advantage of—when you’re 70 and a half, you’re required to take a minimum distribution, or a Required Minimum Distribution (RMD) from your IRA. A lot of people at this age don’t need that money; usually they’ve done well, invested wisely and yet they’re still required to take out that money.

Let’s say the RMD is $10,000—they have to take out that $10,000 and pay taxes on it, hence the requirement. The government wants to tax that money. Through 2012, there is exclusion in place that lets you take out that money but not pay taxes on it by donating it instead. By donating the RMD directly to a charity, you don’t get taxed on it and you’re helping people. You won’t get a charitable deduction for it, but not having to pay taxes on the cash as income more than makes up for that.

Gifts are a good thing to do too, as they are not taxable to the recipient and not deductible by the person that gives them. Now, we’re not talking about giving your son a new computer, or buying your wife that diamond necklace she’s always wanted, these are gifts from an estate-planning standpoint. So if your parents give you a monetary gift, it will not be counted as income to be taxed on your return, nor will your parents be able to count it as a charitable deduction—as long as it’s less than $13,000.

But if you wanted to minimize your estate taxes, that’s when giving more than the $13,000 limit is beneficial. Here’s a good example: an elderly lady has $8 million and has more than enough to live on for the rest of her life. Because she has four children, she may want to start making gifts to the children in order to get the money out of the estate. She can file the gift tax return, as there’s no tax on a certain amount in the first transfer. This way she can reduce the amount of estate taxes she pays on her assets when she passes away. For more information on this and how to maximize your estate plan, please contact our trusted colleague, Robert Lamm of Cummins & White, LLP, who is an expert in advanced estate planning techniques.

Not sure what to do before the end of the year to save as much as possible on your tax bill? Are you scared that you’ll make a mistake on your tax return? Please give Simons Accountancy a call. We are honest (and award-winning!) accountants who can provide accurate tax returns and bookkeeping at a price that fits your budget. You can use our online form or you can just call us direct: (714) 637-4552.

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