Last Chance to Do Something Smart in 2006
These strategies will cut your taxes and prep you for the new year. But you have to act by Dec. 31.
By George Mannes

(MONEY Magazine) – Face it: Time is running out. With just a few weeks left in 2006, you know you can't lose those 10 pounds, learn to play the piano or accomplish any of those other New Year's resolutions you made last January--including the promise to get your finances in better shape (save more, spend less, yada, yada). But rather than beat yourself up over what you should have done these past 11 months, get productive in the month you have left. Take these eight steps before Dec. 31 to help lower your taxes and position your family for a more prosperous 2007.

• Take Your Losses

The Dow may be ending the year in record territory, but most of us still have a few duds sitting in our portfolios (after all, many late-'90s high fliers are still down 50% or more from their peaks). If there's not a reasonable chance of recovery soon, sell those clunkers now and use the losses to offset capital gains you've reaped this year. If, perish the thought, you have more losses than gains, you can take up to $3,000 of those leftover losses to offset your ordinary income. If your losses are greater than $3,000 (now this is getting depressing), you can carry the excess forward to reduce your taxable income in 2007 and later years.

• Buy Some Aspirin

Perhaps you've heard the good news about flexible spending plans, which let you set aside pretax dollars for health-care or child-care bills. Under new rules that recently took effect, the plans can now let employees tap the accounts as late as March 15 of the year following sign-up, rather than the usual Dec. 31 date. But here's the catch: According to Jennifer Calhoun of Mercer Human Resource Consulting, many companies have kept the old deadline because of complexities in implementing the new policy. So check with your HR department to see when your deadline is and what expenses are eligible. If you're on the old clock, race to the drugstore and start stocking up. (Pain relievers: yes! Herbal supplements: not likely.)

• Be Generous

Make one last round of charitable donations, whether it's cash, appreciated stock (you can take the current value as a deduction, not your purchase price) or high-quality goods (See Do It Now, page 57). Feeling charitable but indecisive about which nonprofit should get your money? Give money or securities to what's known as a donor-advised fund. You can take an immediate deduction this year while waiting until next year or beyond to distribute the money. Sound upper crust? Maybe, but you don't have to be Rockefeller-rich to play; Fidelity just lowered the initial investment on its Charitable Gift Fund (charitablegift.org) from $10,000 to $5,000.

• Get IRA Smart

Are you (or a relative) older than 70½? Be sure to take the required minimum distribution from your IRA by Dec. 31 (April 1 if you turned 70½ in 2006). Otherwise you'll get walloped by a 50% tax on the money you should have pulled out but didn't. "It is astonishing how many people miss the deadline," says Jay Hutchins, a certified financial planner in Lebanon, N.H. And here's a new option: In both 2006 and 2007, you can donate up to $100,000 directly to charity from your IRA, by-passing the usual taxes on withdrawals--and the gift counts toward your required distribution. Move quickly, though: The gifting deadline is Dec. 31. And because of the extra paperwork and logistics involved, some IRA administrators are setting deadlines earlier in December.

• Set Your Sights Clearly

A quarter of Americans are expecting a year-end cash bonus, according to a recent MONEY/ICR poll. Let's assume you're one of them. (Congratulations.) What are you going to do with this windfall? Put the money in a Roth IRA? Set it aside for a Caribbean vacation? Sock it away in your kids' 529 college accounts? Make your decision now. "If you don't think about where you're going to put your bonus before it actually arrives, it will vaporize--poof!" says Kevin Sale, a financial planner in Bloomington, Minn. "Don't fritter it away on things that don't mean that much to you."

• Make Some Adjustments

Traditional year-end advice holds that you should speed up or slow down tax payments or self-employment income--say, by prepaying January's property taxes in December or delaying bills to clients until the start of the year. That way, you can take advantage of possible changes in your tax bracket or reduce your exposure to the alternative minimum tax. But which of us non-C.P.A.s are really qualified to game the system that way? Consult an accountant if you want help, or focus on simpler tasks with a proven payoff. Like this: If you got a big tax refund last year, adjust your withholding for 2007 to put extra cash in your paycheck. And make sure you have the correct beneficiaries listed on your retirement accounts and insurance policies, particularly if your family circumstances have changed recently (for example, if you had a child or got divorced). "With at least three-quarters of the people I see," says Debbra Dillon, a certified financial planner in Boise, "something's out of whack with their beneficiary designation."

• Play Retirement Catch-Up

Great news for savers: The maximum 401(k) contribution, which is now linked to inflation, has been bumped from $15,000 to $15,500 for next year; employees age 50 and older can put in an additional $5,000, or $20,500 total. So nudge up your contribution to keep pace. If that isn't realistic, raise your contribution one percentage point. It's like squeezing water from a wet towel: If you try hard enough, you can always wring out another 1% from your spending.

• Have the Talk

In your life, there's probably a difficult financial conversation that you've been meaning to have with a family member but haven't gotten around to. Maybe it's talking with your parents about their retirement finances or discussing long-term financial goals with your spouse. Well, do it this holiday season, when you're face to face with family members and likely have time off from work. "These discussions require more time and energy than you have at the end of a hard day at the office," says Steve Bell, a financial planner in Livermore, Calif. "If you don't do it now, when will you?"

You Say You Want a Resolution

January is the month of good intentions. Here are some ways to make sure you follow through on your financial promises.

PUT IT ON AUTOMATIC

Take the self-discipline out of the equation by setting up an automatic investment or electronic payment plan. People are inconsistent about saving money every month or paying bills on time. Computers aren't.

TAKE BABY STEPS

Don't be too ambitious or vague or you'll give up in despair. Break down big goals like "I want to be smarter about how I manage my money" into smaller ones such as "On Monday I will rebalance my 401(k)."

MAKE IT SPECIFIC

Put a number and date on your goals. Saying "I want to pay down my credit card" is not nearly as motivational as "I'll get the balance down to $2,000 by June 1."

LOOK FOR BACKUP

Don't keep your plans a secret. Share them with a relative or friend who can cheer your progress and red-flag any backsliding. Peer pressure can be a blessing.

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.