Not looking forward to tax time come April 2015? You may be able to make some last-minute moves to ease the burden of your tax obligations next spring. In order to get your taxable income down and take advantage of deductions and credits, make preparations now. Once the doors close on December 31st, you’ll no longer be able to take advantage of certain strategies that can lower your taxable income and therefore your tax bill for 2014. These end of year tax considerations can help you make the most of what you’re entitled to when it comes to deductions and credits.
You should maximize charitable giving before the last day of the year by making contributions and donations to qualified institutions. Remember, keep your receipts! The IRS is now requires proof of donations regardless of the value. Keep in mind you’re not limited to the typical donations of clothes and material items. You could open up a donor-advised fund. If you open a donor advised fund, you can contribute to it whenever you have the money to do so and obtain a tax deduction in that year. You can give the money away immediately, or you can let it stay in the account, invest it, and give it away at some time in the future. And you can directly donate stocks to a charity if you have any that appreciated. You won’t have to pay capital gains tax on them, and you’ll receive a full deduction for the current market value of the asset.
Max Out Tax-Deferred Retirement Contributions
Have you maxed out your retirement contributions yet? Doing so can help lower the amount of taxable income you earned. You can put $17,500 toward your 401(k), 403(b), TSP or similar plan for 2014. Even if contributing up to the limit on your retirement accounts isn’t a realistic possibility, anything you contribute helps lower your taxable income, so be sure to consider extra funds you may have at yearend from a bonus or big contract you’ve landed
Sell Off Losing Funds
In order to offset gains, you can sell off assets that may have experienced a loss this year in personal accounts. You can deduct up to $3,000 of losses each year and carry forward the balance. If you’ve had more losses than gains, then you’ll be able to take advantage of the deduction. This is typically referred to as “harvesting losses”. Be aware that according to the IRS’ Wash-Sale rule, if you do sell assets at a loss, you can’t buy “substantially similar” assets until 31 days have passed. Look at Your Flexible Spending Account Do you have funds left in your Flexible Spending Account? Clean it out! You might be able to carry $500 into the new year as per new IRS rules, but check with your company first. They would have had to opt-in for you to be able to do this. Otherwise, you’ll lose the money that you had in your account, as many FSAs don’t roll over year to year.
Review Itemized Deductions
Before we talk about itemizing, it’s important to note that it’s only worth itemizing deductions if they will exceed the standard deduction. For 2014, the standard deduction is $6,200 for singles, $12,400 for married couples filing jointly, and $9,100 for heads of household. Take the time to review any itemized deductions you might be eligible to take. We’ve already gone over charitable contributions, but consider mortgage interest. If the interest you paid on your mortgage is greater than the standardized deduction, then you should itemize. And for sales and state tax, if you’ve paid a decent amount of income tax to the state or local government, you should itemize – but only if it’s greater than the standard deduction. Unreimbursed medical and dental expenses can’t be deducted unless they’re greater than 10% of your AGI (this also includes glasses and contacts), in which case you can try to bunch deductions. Bunching deductions could be worth it if you’re close to hitting the thresholds required. For example, if your medical expenses are at 9% of your AGI, try fitting in another appointment before the end of the year to push the amount to 10% to receive the deduction.
Other Small Things to Check
- It might be too late this year, but you should check your withholding and make sure that it’s appropriate. Ideally, you don’t want to owe anything or receive a refund.
- If you’d benefit from deferring your income and you receive a year-end bonus, ask if it can be paid out in January instead.
- Don’t sell assets that produce capital gains until January.
- If you’re self-employed, try sending invoices out in early January instead of December.
- Are you a small business owner? Buy office supplies that you’ll need in advance.
- If you’re a homeowner, you can make January’s mortgage payment in late December in order to write off more interest.
Make Your Moves Now
The end of 2014 will be here in no time, so don’t put off any of these actions longer than needed! If you run out of time, make sure you keep these end of year tax considerations in mind when filing for next year. As always, please consult with a financial professional when it comes to your own situation. The tax code is complicated, and it’s better to be safe when dealing with the IRS.