13 Key things to consider before the end-of-year to save taxes
Overview. This article will help you Take the Mystery out of Personal Tax Planning by providing some year-end tax savings tips. (This article does not include special issues that relate to business or self employment). This is to serve as a general guide to help you be more informed. We are not legal or tax advisers; consult your advisers regarding these and other items that may apply to you.
This time of year, now through the first quarter of next year, you will see articles offering year-end tax planning tips. Tax planning tips can increase income in future years, so be careful. Many tax tips often involve accelerating deductions, deferring income, or last-minute charitable deductions (the first three following tips).
For example, you may be compelled to make a large charitable contribution this year by December 31st. However, if you could be in a higher tax bracket next year because of a high probability of a substantial raise or bonus, you would have been better off to make the contribution in January. Some may say this is heartless, but I say just the reverse. If you pay less in taxes because of good planning, your will be better off financially and able to give more in the future.
If you have volatile income, before you use the tax savings tips here and in other articles, you may want to run projections for this year and next. A good accountant will run these calculations for you, but understand that tax law changes from year to year and from one political environment to the next.
- Defer income if you are able to defer income, such as commissions and bonuses until next year, you might be able to pay lower-income taxes this year. However, you must consider what your income and taxes will be next year to be sure that you are not actually increasing your taxes.
- Accelerate deductions such as state income taxes, property taxes, and mortgage interest may help anyone, especially during a high-income year. If you don’t think your personal income tax bracket will be higher next year, and you’re not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
- Charitable Contributions. Consider making charitable deductions before the end of the year to receive a deduction. You must make the contribution by year-end. Donate appreciated property such as real estate or stock instead of the proceeds of the sale. You may be able to receive a deduction for the value of the contribution without paying tax on the growth portion resulting from a sale, then a gift. If you intend to transfer appreciated property, begin early since it will take several weeks to make the change.
- Alternative minimum tax traps. Many people face large AMT bills compared to previous years. Be warned if you have larger than usual medical expenses, non-federal income and real estate taxes, or miscellaneous itemized deductions; or if you have exercised large stock options, to name a few. Year-end tax planning strategies can backfire under AMT. Be very careful accelerating some deductions and exercising stock options at year-end. See a tax professional for information on your specific tax situation.
- Be careful when investing new money in mutual funds at the end of the year. Call the mutual fund and find out when the distribution date is. You may want to purchase after the distribution date to avoid owing taxes on fund shares that you owned only for a short period of time and had little to no gain. This tip is particularly applicable to end-of-year 2014, since many mutual funds are performing very well in light of a strong stock market.
- Contribute the maximum to retirement accounts allowable to employer-sponsored defined contribution retirement plans, such as profit-sharing, 401(k), 403(b) and 457(b) plans. This not only provides an excellent tax deduction, but it also helps you to plan for your future retirement. You may want to contribute to an IRA; and it may be is fully deductible if you did not participate in a company-sponsored retirement plan or if your income falls below certain levels. If you are self-employed, you can contribute more to a pension plan than into an IRA. You have until December 31 to set up the plan.
- Investment Losses may provide some tax savings, for example if your investment portfolio has stock that has depreciated in value and is worth less than when you originally purchased it, you may want to consider selling it. You may be able to use that loss to offset capital gains and ordinary income. Be careful though; investment decisions should not just be for tax purposes. Make sure that you do your research before selling any investment. Some people react too quickly when investments lose value; others sometimes hold on too long. If you decide to sell and invest in something new, make sure that you examine your portfolio to ensure that you have the right mix of investments to match your investment profile, risk propensity and asset allocation model.
- Save for College. Consider contributing to your child’s college savings into a 529 plan. The contributions are not deductible on your Federal return, but parents may be able to write off contributions up to a certain dollar amount on their state income tax return. Log on to SavingforCollege.com to find out information about your state.
- If self-employed, buy equipment and supplies. Have you been putting off buying needed business equipment and supplies, or do you know that you will soon need them? Now may be the time to invest in your business and save taxes as well. Business tax can be complex; therefore it may be wise to first call your accountant prior to large purchases.
- Give gifts to children or other friends and family, it is usually not taxable to the recipient or the giver. Many people do not realize though if that gift exceeds $14,000 per person could be taxable to the giver, and at a high rate. Therefore, if you intend to give anyone more than that amount, you could give some this year and some next. The second tip is that you and your spouse can both give $14,000 per person, doubling the amount not subject to tax. Be sure to consult your legal and tax adviser prior to making all gifts, including ones that may have appreciated in value since you bought them. Also, ask about the lifetime maximum gift and estate exclusion amount ($5,340,000 -2014) and how your gifting program effects that.
- The “Great Deduction Two-Step.” This idea comes from an article in the Wall Street Journal. It suggests that some people can save taxes by alternating between years of how different deductions are taken; standard deduction one year, and itemizing the next year. For example, in one year make larger charitable deduction (#3 above), and prepay next year’s state and local taxes. In the following year, they might decide to take the standard deduction of $6,200 for a single filer and $12,400 for joint returns. The author of the article said by alternating strategies every two years; some tax payers may minimize their overall taxes throughout the years.
- Medical write-offs. This one maddens me, because I think all qualified health expenses and personal health insurance premiums should be deductible, but they are not. Consider that the costs of health care and health insurance only continues to rise at rates faster than inflation, but health insurance doesn’t cover as much as it once did. We all have higher deductibles and co-insurance stop-losses, so it seems like this is such an obvious instant way to garner votes at election time. Un-reimbursed medical expenses are only deductible to the extent that they exceed 10% of adjusted gross income (AGI). It used to be 7.5%, but that is only left for some people age 65 or older.
- Tax advice and investment expenses: You may be happy to learn you can deduct certain expenses as miscellaneous itemized deductions that are more than 2% of your adjusted gross income. This includes tax planning and investment expenses. In the investment category are counsel and advice fees, subscriptions to financial publications, custodial fees for IRAs and some other retirement plans, if paid by cash outside the account. Other miscellaneous expenses that may be deductible include online services/software, used to manage your investments, safe deposit box storing certificates or investment documents, fees on dividend reinvestment plans or automatic investment plans, and transportation costs to your broker’s or investment adviser’s office. However, investment commissions are usually not deductible nor are advisory fees related to tax-exempt income.
Summary: Some of you may be working with your accountant or attorney on these and other tax planning strategies, yet this year. Don’t just talk to your accountant during tax season. Did you know a lot of people do most of their financial planning at the end of the year? So now is a great time to get a financial plan (like from eFinPLAN), while you are reviewing your taxes now, and getting ready for tax season after the first of the year.