11 End-of-Year Tax Questions to Ask Yourself Now
Beware the ides of April.
That’s when many of us procrastinators find ourselves in a frenzy, trying to cram a year’s worth of tax planning into the span of a few days. But the act of paying Uncle Sam shouldn’t be treated like finals. After all, it’s not just a letter grade that’s at stake anymore—it’s your time, your peace of mind and, most important, your money.
To clue you in on the tax moves that could lower your overall bill for the year—and help you avoid an all-nighter come April 14—we’ve put together some of the most important questions you should ask yourself now. It may seem like a pain to gather the records and receipts that you’ll need to answer some of them, but you’ll thank yourself later.
1. Do I need an accountant?
Before you do anything, you should decide whether you need the help of a professional. This is especially important to consider if your financial situation became more complicated this year. If you went through a big life change—like getting married, having a baby, buying a home or starting your own business—or if you exercised stock options, you should probably hire an accountant. Unsure? Take this quiz.
RELATED: How to Decide Your Filing Status
2. Should I contribute more to my retirement funds?
The short answer: yes, if you’re not already maxing out your contributions. Tax considerations aside, the more you can save now, the better off you’ll be in retirement. For 2013, you can put away up to $5,500 ($6,500 if you are 50 or older) into your traditional or Roth IRA, and you can contribute up to $17,500 ($23,000 if you are 50 or older) pre-tax to your 401(k). There are also some limits to how much you can contribute based on other factors, such as your income.
The longer answer: Your age and your overall progress toward retirement should factor into your decision to up your contributions. Go here for some helpful guidelines when it comes to determining how much you should save.
Additionally, if you’d like to contribute more than the limits set by the I.R.S., including what’s known as a nondeductible IRA, you have options—but you won’t see current year tax benefits. Read more about them here.
3. Should I convert from a traditional IRA to a Roth IRA?
There are some basics to consider first. For one, the main difference between a traditional and a Roth IRA is not whether you pay taxes, but when you pay them. “If you do a traditional IRA, you get an immediate tax deduction, but when you take that money out later, it’s all taxed,” explains Fred Freifeld, a CPA based in Davie, Florida. “If you contribute to a Roth IRA, you are taxed on the contributions right away, but the advantage is that you won’t be taxed on it forever more.”
Bottom line: If you convert your traditional IRA to a Roth, you’ll pay income taxes on those funds now. So why make a move that means you have to pay more in taxes this year? Because a little pain now could mean a lot less of it later. “If you’re younger, and you’re in a lower income bracket right now,” adds Freifeld, “then it won’t really hurt you.” And you don’t need to convert the whole thing, he adds. If converting your whole traditional IRA to a Roth would push you into a higher tax bracket, or if you don’t think you’ll have enough money set aside to pay taxes on the entire amount, just do a portion.
4. Should I sell any of my investments?
Freifeld warns against just considering taxes when making big financial decisions. “Don’t let the tax tail wag the dog,” he says. However, all other things being equal, there are some tax considerations that may inform your decision to either hold onto or sell investments, such as stocks, mutual funds or real estate. For starters, if you’ve held an investment for less than a year and you sell it, you’ll be taxed at a higher rate on any capital gains—the profit—you made on that investment. So if you can, hold off on selling for a little longer.
Also, if you have investments that have tanked since you bought them, you may consider selling. Those losses can be deducted to offset your capital gains and up to $3,000 of ordinary income. If you have no interest in keeping them in your portfolio, you could sell the investments permanently. But if you think that the investments will eventually go up in value, you could sell them, and then buy them back after 31 days (the I.R.S. won’t allow the tax deduction if you do so under the 31-day time frame).
Just remember that this is still a gamble: It’s possible that you could sell your investment, and then watch it skyrocket over the next 30 days. To combat this, some financial advisers suggest that you sell the loser and reinvest the proceeds in an index fund or similar stock that might have the same potential for gain without being so similar that it would be disallowed by the I.R.S.
5. Are there charitable contributions I haven’t made yet?
You should know that you can’t deduct charitable donations if you’re taking the standard deduction in lieu of itemizing your deductions. So making big donations now won’t help you tax-wise—although it is good for the soul! (Find out if itemizing deductions is a better option for you here.)
If you’re itemizing this year, and think that the food pantry in your community could use some help, or you want to donate to a charity in a loved one’s name for the holidays, then upping your giving at the end of the year is something to consider. But keep in mind that a deduction is used to offset the amount of income on which you’re paying taxes. So “if you’re in a very low tax bracket this year, and may be in a higher tax bracket next year,” you may want to hold off on donating until after the New Year, says Gail Rosen, a C.P.A. who owns a New Jersey–based accounting firm.