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COMMENTARY | Each and every year I have "The Talk" with most of my clients. December 31 is a very important date and you should never underestimate its importance. For all practical purposes, it marks the last opportunity to take an action which will have an impact on your finances and taxes for that particular year.
Give Unto Others
In order for a donation to a qualified charity to be eligible as a current year tax deduction, each contribution needs to be made by the end of December 31. If you make a contribution by check, the check must be postmarked by December 31. If you use a credit card, the receipt must be dated by December 31.
Older than age 70?
If you are more than 70 years old and have an IRA or qualified retirement account such as a 401(k), you must withdraw a certain percentage each year or risk being assessed a penalty of 50 percent of the amount that you did not withdraw. If you had to withdraw $8,000 and neglected to do it or did it on January2 of the following year, then the IRS may fine you up to $4,000. This is one of the most serious penalties that the IRS will impose.
You must compute the withdrawal requirements for qualified plans separately from the IRAs. You can withdraw the total requirement for the IRA's from any IRA, but you must withdraw the required amount of each 401(k) or other qualified plan, from that particular account.
The final installment for those people paying estimated taxes is January 17. However, if you wish to take as a deduction the payment of estimated state income taxes, the payment must be postmarked by December 31.
Contributions to 529 Plans
If you are making a payment into a College Savings - 529 Plan, and are entitled to a deduction on your state income tax return, then that payment must be postmarked by December 31 in order to qualify.
This is also the last month in which you can examine your income versus deductions and make the decision to either incur an expense this year or delay it until next. Perhaps you might need a dental procedure and have the option of doing it now or later. Medical deductions are subject to a threshold of 7 ½ percent and many times people do not incur enough expenses in order to deduct anything. If you are on that cusp, then you might wish to have a procedure done, and pay for, prior to December 31.
The same theory applies to miscellaneous deductions which are subject to a floor of two percent. If you are always just shy of being able to take any deduction, then you might wish to plan on pre-paying some of those costs, bunching them together and become eligible every other year.
While I try to speak to my clients throughout the year on tax matters, December is often the busiest month and one in which we review these guidelines.