Many taxpayers often review tax planning strategies after the New Year. Before you say goodbye to 2014, there are several tax savings strategies that you may be able to implement now. If you wait until after December 31st, it will be too late.
Harvesting investment losses to offset capital gains
Investors can reduce their taxable income by realizing capital losses. After netting capital gains against losses, taxpayers can offset up to $3,000 of ordinary income and carry-forward the remaining amount for future years. Please note that the character of the investment as long-term versus short-term will impact the way in which gains and losses are netted.
Contribute to a 401(K) plan in addition to an IRA
Taxpayers can contribute up to $17,500 ($23,000 if 50 or older) to their 401(k) accounts and lower their taxable income by that same amount (IRC Sections 402(g) and 414(v)). Contributions can significantly reduce a taxpayer’s liability if made by December 31st. For instance, a taxpayer may be able to lower their ordinary income tax bracket all together, which can translate into a lower capital gains tax due on any realized gains for the year. Not to mention, taxpayers may even avoid the investment income surtax. Individual taxpayers with net investment income and a modified adjusted gross income of $200,000 or more ($260,000 or more for joint filers), are subject to a 3.8% surtax on unearned income, including interest, dividends, royalties, rents and capital gains.
Give to charity
Contributing to charity also reduces income tax. The general rule is that you cannot claim a charitable deduction that exceeds 50% of your adjusted gross income (AGI) in any one year. If you donated property and it appreciated, then the limit drops to 30% of your AGI. If your donation does happen to exceed these limits, you may carry forward the unused portion of the charitable deduction for five years.
Separately, you must itemize deductions to claim a charitable donation. Generally, you will itemize deductions if it’s greater than your standard deduction. This is referenced in IRC Section 170 and IRS Publication 521. On another note, a recently passed tax extender allows taxpayer to make tax deductible charitable donations from their IRA’s required minimum distribution.
Sales tax deduction
Taxpayers living in states without an income tax such as Florida, Texas, Washington, Nevada and others, may want to make large purchases by year end. In this regard, they can elect to deduct their state and local general sales taxes.
Review estimated state taxes
Taxpayers can pay their 2015 estimated state taxes in December instead of January to further reduce taxable income. This would not be recommended for taxpayers that are subject to Alternative Minimum Tax (AMT) in 2014.
Consider payments associated with the standard deduction versus itemizing
While the tax benefit comparison of electing the standard deduction versus itemizing can be a useful exercise in maximizing tax savings in a given year, the benefit can be greater if utilized over a period of two years. Specifically, the taxpayer may be able to boost overall deductions for every two-year period by alternating between the standard deduction and itemizing each year.
Do you have other tax questions? If so, contact us at [email protected] and we’ll be glad to assist you. We are here for you.