The following is a checklist that might help you save taxes if you act before the year’s end. Not all strategies will apply to everyone, but many clients will benefit from more than one item. Not all available strategies are listed either.
- If you are over 70 ½ years of age and have retirement plans, make sure you take the required minimum distribution before the end of the year. If you turned 70 ½ in 2014, you can wait until next year to take your distribution, provided you take it before April 2, 2015. You will still need to take another distribution for 2015, so if you delay the 2014 distribution until 2015, you will essentially be doubling your distributions for that year. The penalty for failing to make the proper distribution is an additional tax equal to 50% of the under-distribution amount.
- If you anticipate having a tax liability for 2014, you can increase your withholding for the balance of the year and eliminate or reduce underpayment penalties. Withholding is treated as paid evenly throughout the year, so additional withholding toward the end of the year can reduce penalties in earlier underpaid quarters as well.
- If you have stocks that have declined in value, you may wish to sell them before the end of the year and use the loss to offset other gains for the year or to produce a deductible loss. The net capital loss on a tax return is limited to $3,000 for the year, but any excess loss carries over to future years. You can repurchase them after 30-days have passed and avoid the wash sale rules.
- If a job-related bonus is expected to be paid around the end of the year, you might be able to defer that income into the following year if that is appropriate in your situation, such as when you expect less ‘other’ income next year. See if your employer is willing to put off payment until just after the first of the year.
- If itemizing deductions, a taxpayer can increase those deductions for the year by prepaying certain taxes. Consider one or both of the following:
o Prepay the next installment of your property taxes before the end of 2014, or
o Pay your 4th quarter state tax estimate in December.
Caution: This strategy will not work if you are subject to the Alternative Minimum Tax (AMT), since taxes are not deductible for AMT purposes.
- Reduce your gift and estate taxes by making gifts before the year’s end. For 2014, the amount you may give without creating a gift tax filing requirement is $14,000 per person. You can make gifts each year to an unlimited number of individuals, but you can’t carry over unused annual gift tax exclusions from one year to the next. If you have a substantial gain in a stock or other asset you want to sell, but don’t want the resulting tax liability, there are a couple of techniques you can employ to simply give away the appreciated asset and let the recipient take the gain:
o Charitable Gift – Consider replacing your cash charitable gifts with gifts of appreciated property. By giving the asset to your favorite charity, you receive a charitable contribution deduction equal to the fair market value of the gift and at the same time avoid having to report the gain from selling the asset on your return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock you are considering gifting is less than what you paid for it, sell it, take the loss on your return, and then contribute the cash to the charity.
o Gifts to Individuals – Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Caution, this strategy will not work for children who are subject to the kiddie tax.
- If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawal with respect to your tax bracket. It may be tax-effective to actually withdraw more than the minimum required by law. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of this income.
- If you are marginally able to itemize each year, it may be appropriate to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and the next year contributing nothing and taking the standard deduction, the combined tax for the two years may be less than if a contribution was made in each year.
- If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost. Roth IRAs provide the benefit of tax-free income for retirement.
- If you qualify for one of the higher education tax credits and have not paid enough tuition during the year to achieve the maximum credit, the law allows you to prepay tuition for an academic period beginning within the first three months of the next year and claim the tuition for the current year’s credit.
- If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
- Business clients also should consider making expenditures that qualify for the $25,000 business property expensing (Sec 179) election.
- If taxed by the AMT, you might consider deferring payments that would qualify as a “miscellaneous” itemized deduction, since you will receive no benefit for those expenses. On the other hand, if you are not taxed by the AMT, consider accelerating those expenses.
- If you’re thinking of making non-cash charitable donations, do so before the end of the year to maximize your charitable deduction. And remember that, if you write a check to make a charitable donation, it must be mailed by December 31 to count as a current-year deduction.
The foregoing is a brief summary of several year-end tax strategies. However, you are cautioned not to implement them without first determining how they might impact your particular set of circumstances. Please call for a year-end tax planning appointment if you would like assistance from this office with comprehensive year-end tax planning.