BP Holdings Tax Management, Year-end tax tips for retirees and preretirees

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Black Friday already? Where did the year go? The good news: No matter whether you’re retired or on retirement’s doorstep, there’s plenty you can do before the end of 2013 to avoid giving Uncle Sam more than his fair share of your hard-earned income.

Here’s a laundry list of what experts suggest:

Do a dry run

Lest you do something that you might regret later on, consider taking stock of where you are and where you want to be with your tax return. “The last couple of months of the year is an excellent time to do a dry run on your tax return,” said Andrea Blackwelder, president of Wisdom Wealth Strategies. “By November or December, we have a fairly accurate idea of our income and deductions. However, the timing also provides ample time to take advantage of tax-saving strategies, such as last-minute 401(k) contributions, tax harvesting and charitable contributions.”

For newly minted retirees, Blackwelder said, this tax analysis can be incredibly important. “New retirees often fail to fully understand how to manage taxes in retirement,” she said. “If withholding instructions on Social Security, pensions and IRA withdrawals aren’t accurate or sufficient, investors may pay penalties and interest at tax time.”

By doing a dry run and getting sense of what you might owe Uncle Sam, Blackwelder said retirees can clean up any underpaid taxes by using a critical tax strategy provided by IRAs. For instance, IRA account owners may make a distribution and withhold the entire amount for taxes, she said. “The IRS does not consider the payment late, but rather considers it as taxes paid throughout the year,” said Blackwelder.

Review your income strategy

Retirees should evaluate their income strategy each year, taking account all of the changes that may have occurred throughout the year, said Blackwelder. Changes to consider may include important milestones such as turning 59½ (the age at which you can withdraw your retirement money without having to pay Uncle Sam a 10% penalty for early distributions) or 70½ (the age at which you must start withdrawing money from your IRAs and retirement plans — except Roth IRAs), performance of your portfolio, capital gains, tax bracket and tax law changes, and even gifting strategies.

Donate IRA distribution to charity

Speaking of gifting strategies, retirees over age 70½ with charitable gifts to make before the end of the year should remember that they can donate up to $100,000 directly from their IRA to a charity during 2013, said Michael S. Jackson, a partner with Grant Thornton, who also noted that this “law expires this year, again.”

The benefit: “The distribution is not included in income, which raises adjusted gross income (AGI) and potentially limits other deductions or raises (your) overall tax bracket,” said Jackson. Plus, the amount sent to charity will also count toward you required minimum distribution (RMD) for the year.

Other advisers also recommend donating your RMD to a charity. “Since so much of the current tax calculation is based on AGI, the fact that these distributions don’t count toward one’s AGI makes them potentially much more valuable than the charitable deduction even when using appreciated property, said David Mendels, the director of planning at Creative Financial Concepts.

“It is especially valuable for those generous souls whose charitable contributions are already up against the AGI limits” he said. “Since it is not included in AGI it effectively, gives rise to a charitable deduction where there otherwise would not have been one while still meeting the minimum distribution requirements. In both cases it sidesteps the AGI/MAGI problems.”

Speaking of charity

You might also consider, especially with the stock market trading at all-time highs, gifting highly appreciated securities to a charitable gift trust, said Catherine Gearig, a financial adviser with LifePlan Financial Advisory Group.

For example, let’s say that you have a taxable account at brokerage firm as well as a donor-advised fund or charitable gift trust. You could “shave off the gains” in those investments that have had “significant growth and send them to the charitable gift account,” said Gearig. “Depending upon how much is gifted, this could serve the same purpose as rebalancing the account. Plus, you can deduct the amount gifted on your tax return.”

FYI: Gifting to individuals is on a calendar-year basis and must be done before the end of the year, said Blackwelder.

Speaking of RMDs

And since we’re on the topic of RMDs, don’t forget to take your RMD. This is especially important for those who turned 70½ in the early part of the year. “A RMD may be required to be taken from qualified retirement plans before the end of the year,” she said. And just in case you need some extra motivation: The penalty for not taking the RMD is substantial—50%.

For the record, RMDs begin in the year you turn 70½. Not age 70 and not age 71 but age 70 ½. So who is age 70 ½ in 2013? If you were born from July 1, 1942 up through June 30, 1943 you will be 70 ½ this year. Read more from Ed Slott’s website, Required Minimum Distributions and Age 70½.

Contribute to an HSA

You might have a planning opportunity if you have a high-deductible health insurance plan that allows contributions to a Health Savings Account, or HSA. “HSAs can do double duty as retirement accounts and they have the tax benefits associated with both traditional IRAs and Roth IRAs,” said Jorie Pitt, an associate financial planner at AHC Advisors. “We often recommend that our clients consider making full contributions to their HSAs each year but avoid using the money to pay for health-care needs. Instead, we encourage them to invest the money inside their HSA for retirement.”

By doing so, you get a tax deduction for your contribution and you get tax-deferred or tax-free growth on the contribution and the investment earnings depending on the future use of the money, said Pitt. “If you use the HSA assets to pay for qualified health-care costs now or in the future the contribution and the earnings are withdrawn tax free,” she said. “If, after the age of 65, you use the HSA assets for non-health care costs then the contribution and the earnings were tax-deferred and the money will be taxed upon withdrawal from the HSA.”

By way of background, HSAs were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses, according to the Treasury Department. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA, according to the Treasury Department.

For 2013, the HSA contribution limit (for employer and employee) is $3,250 for individuals and $6,450 for families. The HSA catch-up contributions (for those age 55 or older) is $1,000. Learn more about the 2013 HSA contribution limits here. And learn more about HSAs at the Treasury Department’s Resource Center website.

Of course, if you decide to contribute to an HSA, make sure that you have money set aside in non-retirement accounts that you can access in case of emergencies. Otherwise, said Pitt, you might find yourself dipping into your HSA or other retirement accounts and possibly face paying a penalty.

Do you have medical deductions?

Speaking of health-related expenses: Beginning in 2013, Jackson said the AGI threshold for those individuals under age 65 rises to 10% of AGI. But for those 65 and older, the 7.5% of AGI threshold remains in place until 2017.

Don’t forget the Medicare deadline

And since we’re talking all things health care, do remember that the Medicare deadline is Dec. 7. Blackwelder those age 65 and older must sign up or face future penalties and higher costs. Changes to existing plans must also be made before the deadline, she said.

You should contact Medicare.gov about three months before your 65th birthday to sign up for Medicare. You can sign up for Medicare even if you do not plan to retire at age 65.

Read Medicare’s Open Enrollment period is Oct. 15 to Dec. 7.

Contribute to your employer-sponsored retirement plan

If income and savings allow for it, Blackwelder suggests diverting a large percentage or all of December’s paycheck toward your company-sponsored retirement plan. “Workers who receive large bonuses in December, or expect the bonus in January, can benefit by contributing as much as possible to their retirement plan before the end of the year,” she said. “The benefit, of course, is that more is saved for retirement and less is immediately taxed.”

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