Year End Money Moves for the Wealthy

Towards the end of the year, wealthy folks are not only thinking of the Thanksgiving Day feast and Christmas morning, but are also taking steps to wrap up their money year in the best and most tax efficient fashion.

Here are a few money moves the wealthy consider making at year end.

Make annual gifts to friends and family.

You can make annual gifts tax free to as many individuals as you want of up to $14,000 per individual.

The money has to be able to be used by the recipient right away, so if you want to put it in trust, you have to give the beneficiary Crummey powers – the right for a limited time (like 30 or 60 days) to withdraw from the trust the amount of your annual gift. If you do this, the trustee must send notice to let the bene know that they can withdraw.

If you think that you will end up with more than 5.34 million (or 10.68 million for a couple) in your estate when you die, then each year that you don’t make annual gifts is an opportunity lost to avoid taxation at 40% when you die.

Donate to charity.

Most of us realize that there are deductions available when we donate to charity. Get that donation in before the end of the year to reduce this years tax bill by the allowed deduction amount.

There are ways to donate that still allow you to use some of the proceeds from the donated funds or that allow you to still leave residual principal to your heirs. Check out Bloomberg’s article How Wal-Mart’s Waltons Maintain Their Billionaire Fortune  for some of the details.

Pay for medical, dental or educational services.

If you have a grandchild or niece or nephew in college, instead of giving them a money gift, pay for a semester of their tuition or for medical or dental expenses. You have to pay the provider directly for this and you don’t have to count the payments towards your annual gift or your lifetime tax exclusion amount.

Reduce business net income.

If you have a small business of your own (such as a blog like this) and need to purchase something for it, consider doing so before the end of the year. The purchase is charged as an expense and directly reduces your net income (on which you pay income tax as well as other taxes like social security).

Review estimated tax requirements.

Make sure that you have paid in enough on your quarterly estimated tax payments to avoid a penalty at tax time. The IRS expects the taxes to be paid when you get the money, not just when you file your taxes. One year, we had income in 2nd quarter that we forgot to include in our estimated tax calculations. Even though, at the end of the year, we were due a refund, we still got to pay a penalty on the 2nd quarter earnings!

Confer with your accountant.

Tax planning should be done year round, not just in prep for April. Checking in with your accountant and knowing your tentative financial results, however, might lead to recommendations as to whether or not you should do an IRA conversion to a Roth from a Traditional, or whether you should donate more this year and group your charitable contributions to maximize tax benefits or wait until next year to spread them out.

Sell losers.

If you have some investments that haven’t panned out and you want to reduce your capital gains on other investments that you sold, consider selling the losers before year end to lower your capital gains tax.

Manage deferred income.

If you anticipate a higher than normal income year, you may decide it would be better to be able to postpone receiving income that can be deferred.

As an employee, you may not have total control over when income flows to you. However, if you get a year end bonus, it may be worth asking your employer to defer paying it to you until next year.

Complete projects providing tax benefits.

Don’t live your life for taxes, but if you are going to do some project or make a purchase anyway, consider the tax implications before deciding whether or not to get it done before the end of the year.

For instance, energy efficient improvements done in 2013 provided tax credits, but if done in 2014, not so much.

Review trusts in light of proposed legislation.

Laws change all the time. If you have set up trusts as part of your estate planning, you should review them at least once a year in light of any new legislation that might affect them. For example, we set up Marital deduction/by-pass trusts in the 1990’s. Since then, the laws have changed such that some of the provisions aren’t currently necessary.

In addition, you want to make sure the trust is funded correctly and reflects your current desires as to beneficiaries.

Evaluate wealth advisers and trustees.

Is the person giving you wealth, business and estate advice meeting your expectations? Is their advice worth the price?

What about the trustees of your trusts? Are the trustees doing a good job managing the trust funds, complying with all trust and legal provisions, communicating well with you and the rest of the beneficiaries?

What are your year end money moves?