Protect your heirs.
Be sure beneficiary designations for your IRAs and 401(k)s are up to date. If your IRA or 401(k) goes to your estate rather an a designated beneficiary, unfavorable withdrawal rules could cost your heirs dearly.
Death and taxes.
Someone who is terminally ill may want to sell investments that show a paper loss. Otherwise, the "tax basis" of the property — the value from which the heir will figure gain or loss when he or she sells — will be "stepped-down" to date-of-death value, preventing anyone from claiming the loss. If you want to keep property, such as a vacation home, in the family, consider selling to a family member. You get no loss deduction, but it could save the buyer taxes later on.
Roll over an inherited 401(K).
A recent change in the rules allows a beneficiary of a 401(k) plan to roll over the account into an IRA and stretch payouts (and the tax bill on them) over his or her lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years. To qualify for this break, you must be named as the beneficiary of the 401(k). If the account goes to the owner’s estate and then to you, the old five-year rule applies.
Investment and Retirement Planning
Check the calendar before you sell.
You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The "holding period" starts on the day after you buy a stock, mutual fund or other asset and ends on the day you sell it.
Don't buy a tax bill.
Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout, and you'll get a lower price, and no tax bill.
Keep a running tally of your basis.
For assets you buy, your "tax basis" is basically how much you have invested. It's the amount from which gain or loss is figured when you sell. If you use dividends to purchase additional shares, each purchase adds to your basis. If a stock splits or you receive a return-of-capital distribution, your basis changes. Only by carefully tracking your basis can you protect yourself from overpaying taxes on your profits when you sell. If you're not sure what your basis is, ask your brokerage or mutual fund company for help. (Financial services firms must now report to investors the tax basis of shares redeemed during the year. For the sale of shares purchased in 2012 and later years, they must also report the basis to the IRS.)
Mine your portfolio for tax savings.
Investors have significant control over their tax liability. As you near the end of the year, tote up gains and losses on sales to date and review your portfolio for paper gains and losses. If you have a net loss so far, you have an opportunity to take some profit tax free. Alternatively, a net profit on previous sales can be offset by realizing losses on sales before the end of the year.
Beware of Uncle Sam's interest in your divorce.
Watch the tax basis — that is, the value from which gains or losses will be determined when property is sold — when working toward an equitable property settlement. One $100,000 asset might be worth a lot more — or a lot less — than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.
Time claiming Social Security benefits.
Time claiming Social Security benefits. If you stop working, you can claim benefits as early as age 62. But note that each year you delay — until age 70 — promises higher benefits for the rest of your life. And, delaying benefits means postponing the time you'll owe tax on them. Try Kiplinger's Social Security Solutions to find out your optimal solution.
Dodge a 50% tax penalty.
Taxpayers over age 70½ are required to take minimum withdrawals from their IRAs each year. Failing to do so subjects them to one of the toughest penalties in the tax law: The IRS claims 50% of the amount that should have come out of the account. Your IRA sponsor can help pinpoint the amount of the required payout.
Keep careful records of medically necessary improvements.
To the extent that such costs — for adding a wheelchair ramp, for example, lowering counters or widening a doorway or installing hand controls for a car — exceed any added value to your home or vehicle, that amount can be included in your deductible medical expenses.
Include travel expenses in medical deductions.
In addition to the cost of getting to and from the doctor, you can deduct up to $50 a night for lodging if seeking medical care requires you to be away from home overnight. The $50 is per person, so if you travel with a sick child to get medical care, you can deduct $100 a day. You get a tax benefit only to the extent your expenses exceed 10% of adjusted gross income, or 7.5% if you're 65 or older.
Stay actively involved in rental real estate.
Generally, anti-tax-shelter legislation prevents losses from real estate investments from being deducted against other kinds of income. But, if you are actively involved in a rental activity, you can deduct up to $25,000 of such losses, if your adjusted gross income is less than $100,000. You don't have to mow grass and unclog toilets to qualify as actively involved; but you should make sure you're involved in setting rents and approving tenants and management firms.