Year End Strategies By Christina Mae Olson, CFP®
This is the time of year for “open enrollment” at work. Employers give you the chance to change your medical plan and some other benefit options. Be sure to take advantage of your Section 125 Plan. The Section 125 Plan allows you to pay for many medical, dental and vision expenses on a pre-tax basis. You must calculate how much you think you’ll spend on items not covered by your health plan (deductibles, co-insurance, non-prescription medicine, etc.). A small amount is deducted on a pre-tax basis from each pay check and accumulates for you to use, tax-free, for these items. Be careful that you don’t overestimate how much you will spend. Any money you don’t use over the year goes back to your employer!
Do you have children that need day-care? You can pre-tax these expenses on a Section 125 Plan, also. The savings is worth it. If you are in the 25% tax bracket then this is an immediate 25% savings on these costs. Why spend $4000 on day care when you could pay $3000 for the same service? This is free money so take advantage of it, if you can.
While you are at it, why don’t you increase the amount you are deferring into your 401(k), 403(b) or 457 plans? The maximum salary deferral allowed for 2008 is $15,500 into each of these plans. Can you contribute the maximum allowed? If not, you should at least contribute enough to get the full employer match. You are giving away free money if you are not taking advantage of your employer matching funds. Ugh, don’t give away free money!
Are you a homeowner? You’ll be getting your real estate tax bill soon. If you itemize your deductions (Schedule A) on your tax return and if you pay your taxes separately (not in escrow with your mortgage) then you have the advantage of choosing to pay your real estate taxes in a particular tax year. It might make sense to pay your 2009 tax bill in January instead of December. And, in December of 2009 – you could pay your 2010 bill when you get it. This will give you two huge real estate tax deductions in one tax year (2009) and maybe increase your Schedule A deductions to a point that would put you in a lower tax bracket.
December is the month for Medicare recipients to change their Part D drug coverage. If you have items to donate to non-profit groups (7 Rivers LGBT Resource Center, for example) or Good Will – make your donations before December 31st for the deduction to count on your 2008 tax return.
Are you contributing to a Section 529 College Savings Plan? You may only change the investment options in these accounts one time per year. Have you done this for 2008? You should do it now if you want to adjust your asset allocations and rebalance your college savings investments.
Have you heard of the term, “tax loss harvesting?” Do you have capital losses on paper in your taxable investment accounts? You can sell shares of mutual funds or stocks that have gone down in value and also sell shares that have gained over the years. Selling both losers and gainers allows you to escape paying tax on the gain. You can also sell $3000 worth of shares at a loss and apply this to reduce your taxable income. If you take more than $3000 in losses – you can carry this over to future tax years and use it to reduce your income.
Check on your beneficiary designations on all of your insurance polices (individual and group) as well as your investment accounts. If your situation has changed (new address, new partner, new job) this year you will need to update your personal information on all of these. You don’t want an old lover to get the proceeds from your IRA, do you?
Finally, sit down and have a heart to heart conversation with yourself about your spending and saving habits. How can you spend less and save more? How can you put yourself in a better financial position in 2009? Set spending and saving goals. Eliminate your credit card debt. Pay off your student loan debt. You will feel better knowing that your debt is gone and that you are saving for the future “you.”
Happy Holidays! I hope that 2009 is a prosperous year for everyone! (2008 was a zinger not worth repeating.)
Please call or email me if you have topics you’d like me to address in the newsletter in 2009.
Chris Olson is a certified financial planner™ with a fee-only practice. You can reach her at CMOney@centurytel.net or 608.525.9818.