With the end of the year fast approaching, put aside some time to plan your year-end strategies to minimize your 2014 tax liability. Here’s a top-five list of savvy tax-planning tactics that might apply to you.
1. Maximize retirement savings contributions. Take full advantage of contributions you can make to retirement plans. You may be eligible for tax-deductible contributions to traditional IRAs (depending on your modified adjusted gross income and tax-filing status) and your contributions to employer-sponsored retirement plans may be made on a pretax basis, both of which can help reduce your taxable income. For the 2014 tax year, you can contribute up to $17,500 (or up to $23,000 for individuals age 50 or older) to a 401(k) plan. You may also contribute up to $5,500 (or up to $6,500 for individuals age 50 or older) to a traditional or Roth IRA.
2. Time your income. If you receive year-end bonus pay or have other sources of income that you can control the timing of, examine your tax situation in both years to see if it’s better to receive the additional income in this tax year or postpone it until 2015. Estimating your income can help you plan ahead for other potential tax implications, such as whether you will be subject to a surcharge on your net investment income or if your Social Security benefits will be taxable.
3. Project investment income. It’s important to understand how your investment income will be taxed. In general, long-term capital gains and qualified dividends have a lower tax rate than short-term gains, nonqualified dividends and ordinary income. Holding an investment for more than one year before selling it usually results in a long-term gain as opposed to a short-term gain. Plan appropriately for any capital gains and consider “harvesting” your losses by selling underperforming investments to write off some or all of your capital gains. In particular, higher income investors need to be aware of the potential 3.8 percent surcharge on net investment income.
4. Take advantage of deductions. Be sure you understand all of the tax deductions you might be eligible for, particularly the “above-the-line” deductions that reduce your adjusted gross income (AGI). Those include items like alimony, self-employment health insurance or traditional IRA contributions. Much like timing your income, you can also accelerate and combine some itemized deductible expenses, such as property tax, local tax payments or medical services.
5. Make charitable contributions and gifts. Don’t forget that donations to charitable organizations that are mailed on or before December 31 count toward your 2014 charitable contributions. This common year-end tax strategy can use a variety of assets and can be set up in strategic ways to maximize tax efficiency. Additionally, taking advantage of your annual gift-tax exclusion can be a beneficial way to provide support to family members now and help reduce or avoid estate taxes later. You can gift up to $14,000 ($28,000 if both spouses make a gift) a year to an individual in the form of cash, stocks, bonds or other assets.
While all of these options may not apply to you, chances are good that you can consider some of these strategies as we close out the year. Please contact your tax professional for tax advice or contact us if you have questions about your investment and savings opportunities.