10 Smart Money Moves to Make Before 2016
In the chaotic season of spending money on holiday gifts and travel to visit family, the last thing you might want to do is take stock of your financial situation. You already know you’re spending money right now – a lot of it – and you barely have enough time to get everything done. But even though it’s a crazy time of year, it’s also the best time to make sure your money is working for you, and that you’re keeping as much of it as you can.
For most people, tax preparation starts after you receive your W-2 from your employer in January. Then begins the arduous process of compiling your records of income, charitable giving, and interest payments throughout the previous year. Though you’ll still have that to look forward to in 2016, there are plenty of things you can be doing before the end of the year to put your best foot forward, both in terms of tax advantages and making the most of the funds you have.
In accounting for everything from your medical savings to your retirement accounts, there’s a lot that goes into the holistic picture of your financial health. The holidays can be a crazy time, but there’s no better season to take a step back, evaluate your financial status, and make decisions that will be to your advantage in the long run. It might keep you from having the time to enjoy a second glass of eggnog, but there will be plenty of time for parties if you start now.
Vanguard and Bankrate both compiled tips for making sure you’re getting the most out of your money before we say goodbye to 2015. Take a look at what they suggest, and come up with a list of goals to complete before the new year. Who says resolutions need to start on January 1? Plus, if you take advantage of some of the tips now, you might be able to save yourself some money.
1. Contribute extra money to your 401(k)
If you’ve been working with a budget for the entire year, (and we highly suggest you do), you should be able to tell with a quick glance in Excel whether you have extra cash after paying your bills and helping Santa out with some last-minute gifts. If you do have some undesignated money, either from an early bonus or just as a result of good savings habits, consider putting that extra cash into your retirement savings.
By adding to your 401(k), you’ll avoid being taxed on that money for 2015, since most accounts are set up to designate those funds on a pre-tax basis. You’ll also be able to take advantage of any employer matching your company offers, and you’ll be giving extra time to let your money compound for future years.
In 2015, the maximum amount employees are allowed to contribute to their 401(k) is $18,000 – a figure not too many people will be lucky enough to contribute. Still, any amount that gets you closer to that limit is a step in the right direction.
2. Take a look at your Flexible Spending Accounts
Flexible Spending Accounts, or FSAs, are one type of time-sensitive accounts you need to evaluate toward the end of the year. If your employer offers this perk, you’ve likely been able to contribute up to $2,550 to your FSA for medical and health costs in 2015, but you’ll lose that money if you don’t use it before the end of the year. In some cases, you’ll be able to carry over $500 into 2016, but if you overestimated how much you would need, it’s time to spend that money now.
You can use those extra funds to pay for another dental cleaning your insurance doesn’t cover, or schedule an eye exam. You can also use that money to cover contact costs, LASIK surgery, or prescription and over the counter medications (prescription still required for eligibility). According to Kiplinger, you can also purchase first aid kits, knee or ankle braces, and other items that insurance won’t cover. If you need some other ideas, Drugstore.com has a special “FSA Store” section with items most commonly bought with FSA funds.
You’ve already invested the money and you can’t recover it unless you spend it, so you might as well take advantage of what’s available to you. If you find yourself scrambling to spend hundreds of dollars, however, you might want to think about decreasing your contribution in 2016.
3. Be generous in your giving
Mark Zuckerberg isn’t the only person giving to charity this time of year. There are numerous altruistic reasons to support a cause you’re passionate about, and we’d like to think that’s a core reason for our generosity. However, it’s also a time when we can kill two birds by writing one check: a non-profit benefits from our giving, and we secure a bit of a tax break on our earnings.
According to Vanguard, individuals can receive a tax exclusion for giving up to $14,000 in 2015, or double that for joint gifts with a married spouse. If you have more income than you need for the year and want to reduce your tax bill, choosing to help a reputable organization will help you accomplish that goal while also helping others in need.
Organizations can benefit from gifts other than cash donations, Bankrate points out. If you’re holding stocks or mutual funds that no longer fit your investment priorities, you can donate them, saving yourself the reported income for the year. Doing so allows the beneficiary to hold or sell that investment. You can also donate other items like vehicles, on top of the typical donations like clothes or household goods.
4. Defer your income
If you take a look at your income thus far and realize you’re on the cusp of jumping up to a higher tax bracket this year, defer any income you might have coming your way. Add extra money from your paychecks into your tax-deferred retirement plans, and wait to sell assets like cars or stock that will produce a capital gain, Bankrate suggests. If you typically receive a generous holiday bonus, ask your boss if it’s possible to receive that in January instead of at the holiday Christmas party.
For individuals who earned $406,750 or more in 2015 and married couples with more than $457,600, you’ll be in the top tax bracket facing a charge of 39.6% on your annual income. If you’re close to that, taking these steps could keep your taxes at a more palatable rate. But as Bankrate points out, this strategy is good for anyone who’s on the bubble between brackets.
Amping up your charitable giving or paying for college tuition a few weeks early probably won’t offset the full shock of joining a new bracket, but if you’ve already crossed over to a higher tax rate, those deductions could help make the tax bill a little less horrifying.
5. Make your home work for you
If you’ve purchased a home, mortgage payments are probably the least fun item on your to-do list every month. But if you can afford to pay January’s payment before December ends, you’ll be able to lump that mortgage interest into your home deductions for 2015. You can do the same for early property tax payments, Bankrate points out.
6. Consider your IRAs
Individual Retirement Accounts won’t yield the same tax benefit as a 401(k) since you may only contribute up to $5,500 ($6,500 if you’re 50 or older), but in some cases you’ll still be able to get a deduction for your contributions. Even if that’s not the case, opening an IRA with extra cash from your year is a great way to prepare for the future with money that’s not already spoken for in your budget.
Vanguard also suggests that if you already have a sizable traditional IRA, you might be able to convert it to a Roth IRA (which is taxed when you contribute, instead of when you disburse the money). Depending on your financial situation, this could save you money on your tax bill, either this year or in the years to come.
7. Harvest tax losses
Though a slightly more complicated maneuver, harvesting tax losses can be valuable for investors who have put money into non-retirement accounts like mutual or index funds. In many cases, assets that have lost money over the year can be used to offset capital gains you’ve made on other accounts, sometimes up to $3,000. If you orchestrate that while also moving toward a more tax-efficient fund, you’ll be able to decrease the tax liability on your investments in future years, Vanguard suggests.
If you’re an experienced investor, this should be old hat for you. But if you’re a novice investor, it’s probably worth a visit or call to your financial advisor to walk you through the process for the first time. It’s hard to be an expert on tax law, so to take full advantage of this, it might be worth seeking professional advice.
8. Rebalance your portfolio
People are normally against rebalancing their investment portfolios because it often means paying higher taxes that year, Vanguard senior advisor Anish Patel writes. But with some careful planning (likely with help from your advisor), you can mitigate those fees as much as possible while optimizing future earnings. Keep in mind that taxes on your investments means they’ve been performing well. It might not take the sting away from the bill completely, but it should be a silver lining.
If you rebalance over a period of several years, you’ll pay taxes on gains over multiple years, but in lesser amounts. In some cases, this will keep you from moving into a higher tax bracket, Patel suggests. You likely won’t face these types of quandaries unless you’re nearing retirement, but it helps to keep an eye on a few years down the road, and make preparations while you can.
9. Check your health insurance
Health insurance coverage isn’t directly applicable to your investments or taxable income, but it will impact your savings if you don’t have adequate coverage when tax filing season comes around. If you don’t have “minimum essential coverage,” you’ll likely face a penalty.
The amount you’ll pay varies depending on how many people in your household are uninsured, and how much money you make. Three or more uninsured members could equal a penalty of $975 or more for the 2015 tax year, CPA Robin Tuttle Christian told Bankrate. You might not be able to do much about previous months when you were uninsured, but looking into coverage options now will help to alleviate that penalty by March or April.
10. Evaluate your year and future goals
No matter your stage in life, evaluating your year and preparing for the ones ahead is never a bad idea. Doing this before January also gives you a chance to take advantage of tax options, especially if you’ll be freeing up money for big purchases.
“If a new car is on the horizon for 2016, it may be smart to make some money available in this tax year to help spread out the tax cost of selling investments,” Patel advised in his Vanguard post.
On top of that, take a look at how your investments performed over the year. If they’re actively managed but not performing to your desired level, perhaps it’s time to make a change. No matter what, the end of the year is always a good time for analyzing your budget to make sure you’re on track for your financial goals, whether it’s saving to buy a house, pay for your children’s college tuition, or fund your own retirement. Taking stock of your financial footing at the end of each year is a great way to jump into a new year.