By Caroline Harless and Donna Holm, CPA, MST –
During the frenzied holiday season, it can be challenging to turn your thoughts to your tax situation, but December is the time to take care of any last-minute financial matters. If what you need are more end-of-year deductions, there are multiple options that will allow you to save when you file for 2013. Even better, opting for tax-friendly charitable contributions will get you in the holiday spirit too!
Each year, the first item on your end-of-year tax list should be to make sure you have maxed out your 401(k). The allowable contribution amount changes year to year, so be certain that you know what the current limit is. For 2013, the contribution limit is $17,500 or $23,000 for taxpayers age 50 and older.
Next, you might consider putting money into a 529 Plan (Qualified tuition program), which is an education savings plan with tax incentives. For the most part, funds can later be used for state or private colleges. Neither the location of the investor nor the investment matter when selecting an institution, however, a designated beneficiary must be chosen. A 529 Plan offers an excellent way to provide for your child or grandchild’s future education. Contributions cannot exceed the amount needed for education expenses for the beneficiary, and if you exceed $13,000 per beneficiary in a year, there might be gift tax consequences. However, there is no limit to the number of plans you can set up, so go ahead and get one started for each of the grandkids.
You’ve probably already received plenty of donation requests for end-of-year giving from charities you have supported in the past. Contributing to an organization you support is a benevolent way to lower your tax liability. In 2013, the IRS allows you to contribute and deduct up to $100,000, which can replace required minimum distributions for those over the age of 70½. This law is set to expire at the end of this year. Although it could renew in 2014, it’s not a guarantee, so the time to support your favorite cause is now.
Charitable donations can be used to benefit any registered 501(c) nonprofit organization from medical research to arts programming to religious and educational foundations. This means, you can give money to your child’s school, even if it’s a public institution, to an organization supporting cancer research, the symphony, a teacher’s retirement fund or even your chamber of commerce.
Before making a donation, you can verify a nonprofit organization on a site like charitynavigator.org. As natural disasters and other world events take place each year, both reputable and questionable organizations are formed. You want to know that wherever you send your money, it’s going to be used in the way you want it to be and that the IRS will recognize the organization at tax time.
In addition to cash donations, end-of-year in-kind donations can also provide allowable deductions. Popular large items include old cars and boats, although smaller goods like furniture, clothing and toys fit the bill here too. Keep in mind that any in-kind donation valued at $5,000 or more requires an appraisal in order to be used as a tax deduction.
While you are wrapping up your holiday giving, take some time to give to your future, your family’s education and your favorite nonprofits, and you’ll get back a lot of benefits when you file your 2013 taxes. Discuss these and other options with your tax accountant to start the New Year in the best possible tax situation.