By Laura Pronesti
The end of the year is a critical time when it comes to financial planning. For both individuals and businesses, there are a number of strategies to perform a year-end financial checkup by looking at income tax options, as well as evaluating investments.
In this month’s column, I will be talking about income taxes, while Peter Altman, founder and president of Altman Investment Management LLC, gives advice on investments.
First off, here are some of my recommendations when it comes to end of the year income tax planning.
1. Defer your income. Request that your employer defer your bonus until 2015 if it’s tax advantageous to you. If you run your own cash basis business, delay income by sending this year’s invoices next year.
2. Contribute appreciated stock to a favorite charity to get a deduction for the fair market value — no tax is due on the capital gains.
3. Review your prior year’s tax return for capital loss carryovers and inform an investment advisor when making year-end portfolio decisions.
4. Consider contributing to a Health Savings Account or Flexible Spending Account if it’s offered by your employer. Funds can be put away for medical purposes tax-free. Make sure to review your plan’s terms and use the funds or submit your paid medical bills by Dec. 31 if they do not rollover.
5. Own a business and need to buy office equipment and other capital expenditures? Acquire and remit payment by Dec. 31 to fully write-off the cost in 2014 (up to $25,000).
6. Itemize and looking to accelerate your deductions? Make your state estimated tax payments or property tax payments by Dec. 31 and deduct the taxes paid on this year’s tax return.
7. Beware of Alternative Minimum Tax (AMT). It serves as tax system for the Internal Revenue Service and calculates your minimum income tax based on your income. Certain itemized deductions including medical expenses, state and property taxes, charitable contributions and miscellaneous deductions are disallowed once your income tax goes below the AMT.
8. Consider contributing more to your 401(k). The maximum amount you can contribute in 2014 is $17,500, plus an additional $5,500 if over age 50. The sooner you put money away, the more money you will have at retirement.
In addition to income tax considerations, the end of the year is an opportune time to evaluate investment portfolios and consider appropriate strategies for the new year.
“It can be daunting, however, for the novice investor — or too arduous for the seasoned investor who doesn’t have the time to devote to research and analysis,” says Altman. “Consider tapping into the expertise of an investment professional who can offer you advice for your individual circumstance, and ensure that your portfolio is poised to take advantage of opportunities in the coming year.”
Altman offers the following tips for looking ahead to 2015.
1. Revisit your asset allocation. Does your portfolio reflect your risk profile? Are you too biased towards equity or fixed income markets and need to make adjustments? Remember if you don’t rebalance the winners and losers, you effectively make bigger bets on larger positions – not a good idea long term.
2. It might make sense to take advantage of historically low interest rates by fixing a larger portion of your debt rather than float. The housing market has recovered in many cities this year, and refinancing your primary residence (if you plan to stay in your home) can stabilize or lower your living expenses.
3. Are your fixed income investments heavily geared towards high-yield or long-dated maturities stretching for income? It might be a good time to swap into higher-yielding quality equity alternatives.
4. Be sure to diversify within industry groups. Make sure that no one investment is too great a portion of your portfolio. This can permanently impact your portfolio and hinder long term objectives. Remember it’s the compounding with “singles and doubles” that achieves reasonable goals.
5. Be proactive. Reflect upon 2014 and be sure not to react to short-term disappointments but find solutions that will avoid making similar mistakes. Stay focused on your long term goals and resist the temptation for market timing and headline sensitivity.
6. Objectively review your year-end results utilizing appropriate benchmarks and risk management tools. Make sure that these benchmarks are consistent with your risk tolerance within the context of your long term goals.
7. Missing investment opportunities can be a risk to the purchasing power of your money. Don’t forget that sitting on the sidelines after a big upward move presents a compounding challenge. Get engaged and don’t worry about timing. Your biggest asset is time. Don’t waste it on the sidelines like a deer in the headlights. Be open-minded and humble – and learn to relax.
Year-end investment and tax planning can be effective, but it also takes time. Consider contacting a professional to assist in effective investment and income tax planning for your situation. The sooner you get started, the more opportunities you will have to grow and preserve your assets.
Laura Pronesti, CPA, is a supervisor with Lear & Pannepacker LLP and a member of the Princeton Merchants Association Board. The Hometown Princeton column is provided monthly by the PMA. On the web: princetonmerchants.org.