It’s that time again, as we close out another year, to review some end-of-the-year tax tips that could still be used to save you money. As you likely already know, many of the tax strategies you can employ must be done in the same tax year as they will be claimed. That is exactly why, with some of these strategies, you must act quickly to get your benefit. And remember, you should always consult your tax, legal and financial advisor before making these decisions. But this list gives you a good place to start.
1. Offset gains with losses. Look at your portfolio and see if you have gains and losses. If you have both, you can write off the gains against the losses. If you have more losses than gains, you can also take up to $3,000 of losses against ordinary income. To take a loss for 2014, you must claim the loss by selling the asset or investment that contains the loss this year. You can also take additional losses and "carry them forward" to next year. If you do decide to sell an investment at a loss, and plan on buying it back after you claim the loss, make sure you wait at least 30 days to repurchase it. Otherwise, you will have violated the wash-sale rules, which can penalize you for buying it back too soon.
2. Fund your individual retirement accounts, Roth IRAs, 401(k)s, 403(b)s, Simplified Employee Pension Plans, etc. Most retirement plans require you fund that investment in the year you take the write-off, but not all. With respect to IRAs and Roth IRAs, you can wait until tax filing time, plus extensions. However, I don’t recommend this. I would rather you fund your plans in the year you are claiming the contribution.Employer plans do require you to contribute into the plan (employee contributions), however, during that tax year. So, if you have not fully funded your company retirement plan, get on the ball and talk to your human resources department to see how you can put more money in by year end. Remember, you can add $17,500 to your 401(k), and an additional $5,500 if you are over age 50.
Also, the rules are changing for 2015, so you should change your contribution amount accordingly. IRA and Roth IRA contributions remain the same at $5,500 and $1,000 catch-up for those over age 50. The 401(k) contribution limits increase to $18,000 and a $6,000 catch-up for those over age 50. If you are having funds automatically invested into your retirement plans, update those automatic investments to match the new limits.
Also, consider donating highly appreciated stock to your charity, rather than cash. By doing this, you get a double benefit. First, you get to write off the value of the security, and second, you don’t have to sell the stock or other investment yourself (and realize the gain), before you donate it.
3. Take out your minimum required distribution. If you are over the age of 701/2, you must take money out of your qualified plans (if you are not working or contributing to that plan) and IRAs. The amount you have to take out is 3.65 percent in the first year. Each year you get older, the percentage you must take out increases. But the real kicker here is if you do not take out the money, you will have to pay a 50 percent penalty on the amount you did not withdraw. That’s a hefty penalty (the largest the Internal Revenue Service assesses.) Make sure you get this one right every year.
4. Give $14,000 to anyone you like. The annual (2014) gift amount you can give to someone without having to fill out a gift tax return is $14,000, but you must complete the gift (give it to the person, entity or charity) by the end of the year.
Many investors would say, "Why on earth would I want to give that kind of money to anyone?" But the reality is, some older adults have more than enough assets in their portfolio that they want to give it away early (before they die so the kids or charities get the benefit now). But there is still a limit per year with respect to how much you can actually give away. Again, that amount is $14,000 for 2014. If you are married, you and your spouse can both gift $14,000, making your total contribution $28,000 per person.
Sometimes gifting appreciated stock to a family member in a low tax bracket can also be helpful in reducing your overall tax liability.
5. Use your flex spending dollars. Flex spending plans give you the ability to put money away pretax, to be used for qualified medical and dental expenses. But those dollars must be used in the current tax year. The IRS will now let you roll up to $500 to the next tax year (provided the plan allows for it). But for any amount over the $500, it is “use it or lose it.”
6. Take your expenses this year. If you are a business owner or self-employed, and can deduct expenses, pay expenses now versus in 2015. This will lower your overall income, and thus your tax as well. Some of the expenses you may consider paying early are interest, rent, medical insurance premiums, vendor expenses, etc.
7. Pay your January mortgage payment in December. If you pay your January mortgage payment early, you are essentially paying the January interest in December, which will allow you to write it off now, versus a year from now. This may not help you significantly, but every little bit counts.
8. Combine Schedule A deductions. Many Schedule A deductions have thresholds you must meet before you can take that specific deduction. For example, the medical/dental deduction must reach 10 percent of adjusted gross income. That means you must meet the 10 percent before you can deduct anything. The miscellaneous expense deduction must be 2 percent of adjusted gross income. So make sure you are able to combine all of the proper expenses to be able to meet that specific deduction’s minimum.
9. Do a mock tax return. Using tax software, such as TurboTax or H&R Block software, run a mock tax return, so that you know your potential tax liability. This can help with knowing how much of a deduction you can take for IRA contributions, the effects of a Roth conversion, if you are subject to the Alternative Minimum Tax, the potential tax bill you may have to pay by April 15 and a number of other important things you may want or need to know early.
Not all of these things will apply to everyone. As a matter of fact, only a few of these strategies apply to most people. The question you need to answer is, "Which ones apply to me?" So read over this list several times, and figure out which tips will give you the best benefits for your 2014 taxes. Then implement those tips.
If all of this information seems overwhelming, as it does for most people, then work with someone who can help you. This could be your tax accountant, investment advisor or financial planner. But whatever you do, make sure you do the planning. It may actually save you some real money.