Don't Forget These Year-End Must-Dos

In this week's Financials edition ofIndustry Focus, Motley Fool analyst GabyLaperatalks with Fool director of investment planningDan Caplinger about some tasks you need to take care of beforeDec. 31. With ideas including tax-loss harvesting, making sure you don't lose any of your flex account money, and maximizing your deductible expenses, you can put yourself in the best possible position to start off the new year on the right foot.

A full transcript follows the video.

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This podcast was recorded on Nov. 28, 2016.

Gaby Lapera: Hello, everyone! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. You arelistening to the Financials edition, taped today on Monday,Nov. 28, 2016. My name is Gaby Lapera,and joining me over Skype is Dan Caplinger, aMotley Fool personal finance guru. Hey, Dan! It's nice to have you. How was your Thanksgiving?

Dan Caplinger: I had a pretty good time, Gaby. How about yourself?

Lapera: It was great,we had stuffing, and my mom's mashed potatoes, which are the best mashed potatoesbecause she looks at the recipe and she goes, "Haha,I'm not going to put a quarter cup of milk,I'm going to put a whole cup of heavy whipping creamin it,"and it's delicious.

Caplinger: There you go. We hadgood luck with the potatoes this year,pretty much every kind of cheese that you can imagine in there,worked like a charm.

Lapera: Oooh, that sounds so good. Listeners,if you don't know this about me, I absolutely love food. If you have any recipes you would like me to makeand eat myself --because I'm not going to send it to you,let's be real, that would beunsanitary and disgusting --I would love to have them. You can contact us at Now thatThanksgiving is done, we are heading into December. It's almost the end of the year, whichI can't believe. We thought it would be really goodto talk about some year-end housekeeping thingsyou should think about doing for your taxes,specifically for legally saving money on your taxes. Whodoesn't like saving money? Dan,I figured we should start withtax-loss harvesting.

Caplinger: You bet. That's theobvious place to start. It hasn'tactually been a huge problemfor a lot of investors over the past several years becausewe haven't had that many losses,the stock market has pretty much been shooting straight up. Butmost people will find even if you have asuccessful Investment portfolio, you can'tescape having at least some stocks lose ground. And that's where tax-loss harvesting can really help, byselling off those stocks, taking those losses, and you'reable to use them to offseteither capital gains or,in some cases, other types of income toreduce your eventual tax bill.

Lapera: Yeah,this is really interesting. A lot of people don't realize thatyou have to pay taxes on capital gains. They thinkit's just free money. But it's income, so you have to pay taxes on that. Tax-lossharvesting, just like Dan said, is a great way to offset that. Another thing to keep in mind is --I hadn't thought about this until today --if you own index funds, a lot of them pay out dividends,and that also counts towardsomething you needto pay taxes for. So,keep that in mind. I just want to say that right now,because I totally almost forgot about thatwhen I was thinking about which TurboTax program to buy.

Caplinger: Gaby,just to jump in there --a lot of mutual fund investors,especially this year, now that the stock market has been going up for so long,sometimes they're going to get distributions toward the end of the year that are really big, and they're going to wonder, what the heck is going on here? The fact is, most mutual funds pay out a distribution. Some of it is justthe dividend income that they accumulateover the course of the year. That's usually pretty modest. But if a fund has been successful,sometimes they'll make a really big distribution,and that's all the capital gains that all of theirsuccessful investments that they've decided to sell off during the year, it's those gains getting passed out to their fund holders. That's one reason why tax-lossharvesting can be smart, because you can use the losses that you harvest in order to offset those capital gainsdistributions that those mutual funds pay out to.

Lapera:Yeah,absolutely. Just a reminder to our listeners,there is a difference between short-term and long-term capital gains taxes. Short-termcapital gains taxdepends on your income, but I believe you have the number off the top of your head, Dan?

Caplinger: It's a year or less,if you own something for one yearor a shorter period of time, thenyou have to pay taxes onwhatever your ordinary tax bracket is. That goes as high as39.6%,depending on what your income is. Long-term capital gains,on the other hand, that's for stocks or other investments that you hold for longer than a year -- so, a year plus one day, or longer -- those get apreferential tax rate,and that depends on your tax bracket. Forthose who are in the lowest two tax brackets, those long-term capital gains are tax free, it's 0%. Foreverybody else, it's 15%,unless you're in the highest possible tax bracket, then it goes up to 20%. But that's still just barely half of what theordinary income tax rate is at that point. So, it's a big tax savings,gives you an incentive to hold on to those stocks longer than a yearif you have gains on them.

Lapera: Absolutely. So,definitely keep that in mind. That's one of the other benefits offollowing The Motley Fool's philosophy ofbeing a long-term investor. Not to gettoo much like I'm drinking the Kool-Aid, but I totally am. Thenext thing I figured we would talk aboutwould be charitable donations -- when giving back gives back to you, haha. OK,I'm not as funny as I thought I was. That's fine.

Caplinger: (laughs)

Lapera: You can give gifts of appreciated stock.

Caplinger: Yeah. Just to givethe general gist of this,just about anything that you give to charity istax deductible, if you itemize your deductions, and if it's given without you getting something back in return. A lot ofpeople ask questions like, "IfI participate in some sort of charitable auction or something, and I make a $100 giftand in exchange I get a $100 gift certificate tomy favorite restaurant,"you're not going to be able to deduct that,because that gift certificate is worth exactly what --you essentially paid for it. It's not a charitable deduction,even if you bought it at a charity silent auctionor something like that. But, if you make gifts at year-end -- and a lot of people do theircharitable giving toward the end of the year -- gifts of cash, you write a check, you make a gift by credit card, all of that you willgenerally be able to deduct, as long as you'reitemizing your deductions.

What Gaby wassaying before about appreciated stock,that's actually a really great way to give to charity, because it not only gets you, potentially, thattax deduction for the charitable gift, but it also helps you avoid what wouldordinarily be a big tax bill for you. For instance, say that you own a stockthat has gone up in value from $1,000to $2,000. If you sold that stock,you would have a capital gain, and you would have to pay tax on that capital gain. But if you give that stockdirectly to a charity, you get a fulldeduction for the current $2,000 value, and youdon't have to pay the capital gains. The charity will be the one to sell it, they're atax-exempt organizationso they don't have to pay tax on it. Everybody ends up a winner. That's one reason whymaking gifts of stocks that have gone up in value a lotin your portfolio can bereally big tax savers for you.

Lapera: Absolutely. And just to throw in a word aboutcharitable giving, always make sure you check outthe charity before you give them anything. You can check charities at Charity Navigator, or CharityWatch. Both of thosewebsites give insight into howcharities actually spend your money, so you can make sure thatit's actually going toward a worthwhile cause -- or, your gifts of appreciated stock.

Caplinger: Theother thing to keep in mind,if you are going to go to stock route,you don't want to wait until the last day of the year to get moving on that. With a check,you just write a check and it's done. But with stock, youreally have to work with your brokerin order to get the shares that you ownin your brokerage account over to your charity. That can take days,or even a couple of weeks. A lot of brokers will tell you, "If you're going to do this,let me know early in Decemberso that we can get everything moving in the right direction, and there's no question later on that you got it done before year-end." If theimportant activity involvedin getting those shares movedout of your accountdoesn't happen until 2017, the IRS can come back and tell you, "Youdon't get to claim that on your 2016 tax return. You're going to have to wait until 2017 to get it," which isnot what you want. You want to get it done nowso you can claim that deduction now.

Lapera: Absolutely. So, now,people. Think about it right now. Moving on to our next topic, there are all sorts of other itemized deductions that you can double-up on -- so,you can pay two years' worth of the expenses at year-end to max out the deduction for this year. Do you have any comments on what sort of deductions those would be?

Caplinger: One thing you can do isdouble up on your charitable deductions,since we were just talking about charitable deduction. If you have the cash to do it,and if you're in the habit of making a particularly sized giftevery year, you can,instead of making one gift now and waiting until January,or even worse, this time next year to do it,if you go ahead and give your two years worth of gifts now,you can basically double up the deduction. Now,it's true that next year you won't get a deduction for that,because you double it up. But here's the thing:A lot of people are really close to that line betweenwhether they should itemize their deductionsor just go ahead and take the standard deduction. A lot of the time,doubling up can really make the difference between itbeing smart to do the itemized deductions,or to take the standard deductions. Over the course of time,some people find --and check the math to see if it's right for your situation -- that if youdouble up on those deductions,it lets you get more in total deductionsover the long run thanyou would get if you just said, "I have one year's worth of deductions, we'll just claim them year-in and year-out one by one."

Lapera: I have a question. If you double up on yourcharitable donations for 2016,does that mean you can't take the same deduction in 2017? Ordoes it just mean that you would have less,that potentially you would just begiving less in 2017?

Caplinger: Ithas to do with what you do with the money. Justto throw an example out there, say you give someorganization $100 every year. You can keep doing that,and then you'll be able to deduct $100 every year. If you double up and say, "I'mgoing to give my $100 for 2016 and my$100 for 2017,I'm just going to go ahead and get that out of the way now,I'm going to write a check for $200," then you get to deduct the $200 this year,you don't get to deduct anything for next yearbecause you don't pay it next year, you'repaying it this year. If you go ahead and make another --if you decide to be incredibly generous and say, "I know I said I already made my gift,but I'm going to go ahead and give another gift later in 2017," then that's fine, you've actually given more money, so you can take that deduction again. Butthere are a lot of situations where,you can think about it in terms of pre-payingwhat you wouldn't necessarily have to pay until later. Another example that comes in with a lot of people isproperty taxes. A lot of places will charge you half of your annual property tax every six months. Youalways have the option of paying it all upfront in the earlier year. If you do that, you get to deduct it all up in the earlier year. If you don't, then you just claim half this year and half next year. Again, depending on the situation you have withyour standard deduction, withother types of itemized deductions,sometimes it makes more sense to do it one way,sometimes it makes more sense to do with the other way,and sometimes it doesn't make any difference. But it's something to think about,especially this year,because a lot of people are thinking in terms of, "I want tomaximize deductions for 2016 in the hopes that a new administration might be bringing us lower tax rates next year, so those tax deductions might be worth more in 2016 than they will in 2017 and in the future."

Lapera: Yeah, we'll see what happens with that. Thefinal thing we wanted to talk about iskind of tax-related, which is theflex spending account. Your FSA is for healthcare. A lot of employers have this. One of the things you'regoing to do is check to seeif your employer has a grace period or a rollover. By law,I believe you are allowed to rollover $500from year to year.

Caplinger: That's true, but only if your employer activates that option. It'sreally important to go to your employer and find out what your choices are,because each employer can differ. There's a couplebasic different ways that this works. A lot of employers will take either one or the other of these two things. The first one is,a lot of employers will give you a grace period. What you can do then is incur health-related expenses through March 15th of thefollowing year and still count themagainst the money that you put into your flex accountfor the previous year. Say right now you have $500 left in your flex account. You don't foresee needing any medical expenses between now and the end of the year. Ordinarily, that money would be gone. You would forfeit it, because again, the way these flexible spending accounts work is, you pick a number upfront that you're going to takeout of your paycheck and put into these accountsbut if you don't use it, you lose it. But the IRS figured out this wasn't entirely fair. So if your employer offers that two-and-a-half month grace period, then you'll still haveJanuary, February, and the first half of March to incur medical expenses,in order to use up that remaining amount.

Now, thesecond option that employers haveis exactly what you just said. They can let you take up to $500 from yourprevious year and carry it forward into the next year. If your employer picks that then,under the example I just gave,you wouldn't have to do anything. You would just carry forward your $500, and thenwhenever you spend it next year,you could go ahead and do that. The key to remember is, your employer would have to pick one or the other. The IRS doesn't let employers offer both the grace period and the carry-forward. Inaddition, the IRS does not require employers to offer either one of those. If you don't have either one of those working for you,you have to make sure you get that money spent down by Dec. 31, or you'll lose it. Butit's worth making a call or taking a visitto whoever handles payroll and HRstuff at your company to find out exactlyhow your flex spending account works,and to make sure you don't lose any money in the process.

Lapera: Yeah. Andthe other thing is, you want to be carefulthat you make sure you're using yourflex spending accountcorrectly. For example --this happened to me earlier today,I almost illegally used my FSA. I got a dental bill,I went to a dentist out of network,so my dental insurance covered half of the payment, by sending the check to me, and I needed to pay the dentist in full,and I almost accidentally paid the dentist in full off of my FSA, which isillegal, because you can't use your FSAto pay for something that you have already been reimbursed for. You can only pay for the stuff thathas not been reimbursed.

Caplinger: Right. The half that they didn't pay,you would have been OK with. But the half that the insurance hadreimbursed, you're right, that would have been a no-go.

Lapera: Yeah, somake sure you check the rules online, there's the IRS anda few other organizations that havepretty clear rules that you canread. Other things that you can use it for areany qualified medical expense, so,something that requires a prescription ispretty much definitely going to be covered. That includes stuff likemedicine, and I think eyeglasses, correct?

Caplinger: Yeah, that's right.

Lapera: Yeah. So,those are easy ways to spend it. I don't really know,I don't know what else you might want to spend it on. Some employers have anonline store that you can peruse and use your FSA in, and it has all FSA-approved items in it. I'venever done it, but I've also never had any extra,because I don't put a lot into it,I only put enough into it to pay for my dentist. But yeah, just, things to think about so thatyou can get the most out of your money. And also, duringopen enrollment, you can change the amount that you put into your FSA. So,consider what your medical expenses were this year,and what you imagine they might be next year, and adjust accordingly.

Caplinger: That's right. If you have a big balanceat the end of this year, think aboutramping it down for next year so youdon't have the same challenge. But you're absolutely right. I see any number of ads from these outfits that selleyeglasses and contact lenses and that kind of thing. I think end of year is their best seasonprecisely because of this,people have money they need to use up.

Lapera: Yeah. And,of course, you can also spend your FSA on spouses and dependents, but there's rules surrounding that as well, so make sure you read them before you spend. I think that's it, unless you have anything else to say to our listeners.

Caplinger: Justdon't wait too long, guys. I know that it saysyou have until Dec. 31 toget all these things done,but believe you me, there'sa lot more interesting things you want to be doing on Dec. 29, 30, and 31 thanworrying about these last-minute tax moves. Takethe next few weeks, learn what you need to learn,start getting the ball moving, andthat way you can enjoy New Year's Evewithout having to have the tax burden on your shoulders.

Lapera: Very wise words. Also, happy holidays, everyone.I can't believe it's almost December.(laughs) Thank youvery much for joining us, Dan. It'salways a pleasure to have you.As usual, people on the program may have interests in the stocks that they talk about,or don't talk about, in this case, and The Motley Fool may have recommendations for or against, so don't buy or sell anything based solely on what you hear.Additionally, please make sure youconsult a tax professional before taking tax advice from a disembodied voiceon the internet. This isjust a starting point, people. Contact us at, or by tweeting us @MFIndustryFocus. Thank you to Anne Henry, today's producer.I have no idea where Austin went,but I'm sure he's having fun wherever he is. And thank you to you all for joining us. Everyone have a great week!

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