Tax planning: What’s the good news? It’s never a waste of time… there still are some tax breaks on the books that you can use to your advantage before the end of 2014. Some types of time or monetary investments have risks, but not tax-planning. This is why EVERYONE should do it.
The bad news is that there is no guarantee that all the extenders (there is more than 50 business and individual tax breaks) — including popular things such as the higher education tuition and fees deduction, and itemized claims for state and local sales taxes and private mortgage insurance payments — will be renewed after December 31, 2014. Lawmakers are expected to consider, or extend (hence the laws’ collective name) after the November 4th election.
Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Following are ten year-end tax moves to make before New Year’s Day.
1. Defer your income
The top tax rate is 39.6% on taxable income of more than $406,750 for single taxpayers; $457,600 for married couples filing joint returns ($228,800 if filing separately); and $432,200 for head-of-household taxpayers. If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you’re self-employed, don’t send out invoices for year-end jobs until early 2014.
This strategy works even if you are not in the top tax bracket, but just about to cross into the next higher one.
2. Add to your 401(k)
Even if you are nowhere near the top tax bracket, putting as much money as you can into your company’s 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you will have a bit less income that the IRS can touch. Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth. Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.
Few of us will reach the maximum $17,500 that employees can stash in a 401(k), but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $5,500.
In most cases, you can modify your 401(k) contributions at any time, but double-check with your benefits office to be sure of your plan’s rules.
3. Review your FSA amounts
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you do not waste it. You can contribute up to $2,500 to an FSA via paycheck withdrawals. If that limit seems lower, you’re right. As part of the Affordable Care Act the maximum contribution amount was set at $2,500; before the health care law change there was no statutory limit.
As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. And though the U.S. Treasury recently announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to take steps to adopt it.
Be sure to check with your employer, and if you must use your FSA money by December 31st, make sure you do.
4. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8% Net Investment Income Tax. This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.
If you do face the 3.8% surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.
5. Make the most of your home
Homeownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year’s tax bill. Make your January mortgage payment by December 31st and deduct the mortgage interest on your coming tax return. The same is true for early property tax payments.
6. Bunch your deductible expenses
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.
Medical and dental expenses, for example, cannot be deducted unless they exceed 10% of AGI. Miscellaneous expenses, which include business expense claims, must be more than 2% of AGI.
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process, the better. It’s much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.
7. Add to or open an IRA
Remember that added money you put in your 401(k) to lower your taxable income? Bulk up your retirement planning even more by contributing to an individual retirement account.
If you have an IRA account or open a traditional IRA, you might be able to deduct at least some of your contributions on your tax return. If you don’t make a lot of money, your contribution also could be used to claim the retirement savings contributions credit.
Even if you won’t get a deduction, you’ll be adding to your nest egg so that you can retire on your terms. And while it’s true you can wait until the April 15 filing deadline to contribute for the previous tax year, the sooner you put money into an IRA, traditional or Roth, the sooner it can start earning more for your golden years.
Self-employed workers also get an added retirement saving benefit. There are a variety of plans — SEP-IRAs, Keoghs, solo 401(k) plans — into which you can put some of your self-employment earnings. If you are a sole proprietor, your contribution to a self-employed retirement plan also is deductible on your tax return.
8. Be generous to charities
As you are putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles, with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset’s value at the time of gifting. Even better, you do not have to worry about capital gains taxes on the appreciation of your gift.
9. Pay college costs early
The spring semester’s bill isn’t due until January, but it might be worthwhile to pay it before year’s end. By doing so, you can claim the American Opportunity Tax Credit on this year’s tax return.
The American Opportunity credit replaced the Hope tax credit in 2009 and is in effect through the 2017 tax year. It’s worth up to $2,500 with up to 40% of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don’t owe any taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.
10. Adjust your withholding
Did you write the U.S. Treasury a big check in April? Or did you get a large refund from Uncle Sam instead? Neither is a particularly good financial or tax plan.
Most of us cover our eventual tax bills through payroll withholding. Ideally, you want the amount coming out of your paychecks throughout the year to be as close as possible to your final tax bill. If you have too much withheld, you’ll get a refund; too little withheld will mean you’ll owe taxes when you file.
You can correct the imbalance by adjusting your payroll withholding now. The correct amount taken out of your final 2014 paychecks will help ensure that you don’t over- or underpay the tax collector too much next filing season
What Should You Do?
You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.
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