If you want to save on your tax bill come April, now’s the time to make some critical moves. If you have a tax advisor or financial planner, it’s wise to run these ideas by that individual first.
Here are some suggestions to investigate by year-end with follow-up in the new year:
1. Accelerate Your Deductions And Defer Your Income
It makes the list every year because it works. To keep your 2014 tax bill low, try to defer bonuses, consulting income or self-employment income until 2015 while taking as many deductions as you legally can in 2014. Deductions may include paying your January federal and state income taxes before Dec. 31, real estate taxes and interest payments.
2. Bunch Non-Urgent Medical Expenses This Year Or Move Them To 2015
If you have non-emergency medical procedures coming up, it’s a good idea to pack them into the same year so people under age 65 can exceed the 10 percent adjusted gross income (AGI) minimum for medical expenses. For those over age 65, the AGI minimum is 7.5 percent.
3. Make Last-Minute Withholding Adjustments
If you’ve started making more money later in the year, make sure your withholding or estimated tax payments are adjusted before Dec. 31 so you don’t face underpayment penalties later.
4. Evaluate Your Traditional And Roth IRA Holdings
Many people who expect their tax rate to go up in retirement convert traditional IRAs to Roth accounts in advance. Those who don’t do so keep their traditional accounts as-is. No matter how close you’re getting to retirement, it’s a good idea to take inventory of your IRA investments to make sure they’re accessible and to contact your tax advisor if you have questions about strategy.
5. Contribute As Much To Retirement Accounts As Possible
Putting money away for retirement is always a good idea – for your tax bill and for your future. For tax year 2014, individual 401(k) contribution limits are $17,500 and $5,500 for an IRA (not including catch-up contributions for taxpayers 50 or over). In 2015, those contribution limits will go up to $18,000 and $6,000 respectively.
6. Consider HSAs And FSAs
High-deductible insurance plans may offer a health savings account (HSA) option that allows you to deposit pretax dollars to pay for medical expenses high-deductible plans don’t cover. Flexible Spending Accounts (FSAs) also allow pre-tax dollars to pay for dental care, vision checkups and glasses and over-the-counter drugs. FSAs come in a number of varieties, but generally carries a “use it or lose it” provision that requires funds to be spent by year-end with a possible grace period.
7. Gather Up Those State And Local Sales Tax Receipts
If you itemize your deductions, consider whether to elect to deduct state and local sales taxes instead of state and local income taxes. While this is one of those expired “extender” tax breaks Congress was arguing about at press time, it’s likely to pass, and it’s particularly attractive to people who made big purchases subject to sales tax (cars, boats, home construction materials, etc.). While it’s always good to save receipts for exact numbers, the Internal Revenue Service (IRS) features a sales tax deduction calculator that allows you to estimate your sales taxes for the year.
8. Consider A Gift
Individuals can give up to $14,000 a year per beneficiary to as many people as they’d like during 2014 free of gift or estate tax. For spouses, that amount goes up to $28,000 per beneficiary per year. Both individual and spousal numbers will stay the same in 2015. It’s a way to gradually lower the size of an estate to avoid state and federal estate and inheritance taxes, but you have to take advantage of the exclusion every year – no rollovers.
9. Make A Last-Minute Charitable Deduction
If you itemize, you can deduct for charitable contributions – but do some homework first. GuideStar.org lists every IRS-registered nonprofit organization, so you can do full research on the organization’s work and legitimacy as well as its tax status.
10. Take That Home Office Deduction
If you use part of your home for business or if your office is an unattached structure, you may qualify for a home office deduction up to $1,500 a year.
11. Take Tax Losses
If you have investment assets outside your tax-advantaged accounts that have lost value, you might consider selling them. Capital losses can offset capital gains to the limit of $3,000 per year, or $1,500 for those married filing separately. If your net capital loss is more than the limit you can deduct, those losses can be carried forward to next year’s tax returns, where they’ll be treated as if they happened that year.
12. Watch The News And Keep Your Tax Preparer’s Number Handy
Congress may spend its final days arguing over a variety of expired tax breaks still pending – there are some esoteric breaks that serve people like racehorse owners and film producers, but there’s plenty of small business and individual tax breaks awaiting a decision too, including principal residence mortgage debt forgiveness and the option to deduct local sales and use taxes instead of state and local income taxes. In short, this lame duck session could be anything but lame to American taxpayers.
Bottom Line: Use the end of the year to gather records and advice and make smart choices taxwise and otherwise. Also, make sure you’ve made your will, power of attorney and healthcare proxies easy for family members to find if needed.
Source: Huffington Post