Saving money on taxes is like giving yourself a well-deserved bonus. The following three tax strategies require action on your part before year end, but may reduce your income tax burden for 2014.
- Reduce taxable income
- Defer income – It usually is a good idea to push income into the following year whenever possible. Do your best to take year-end bonuses in January, or if you’re self-employed, plan to delay receiving income that you don’t need immediately.
- Save for your retirement – For traditional retirement accounts, you can contribute up to $17,500 for a 401(k) and $5,500 for an IRA in 2014. If you’re age 50 or older, you can also make catch-up contributions that defer taxes until withdrawals. You may also want to convert a traditional IRA to a Roth IRA, paying the taxes now to have tax-free withdrawals in the future (based on withdrawal rules).
- Give generously – Advance giving of inheritance money benefits both the giver and the receiver. An individual can give up to $14,000 per person free of gift or estate tax. A husband and wife can each give $14,000 to a beneficiary, so each person can receive $28,000 gift tax free.
- Maximize deductions
- Accelerate expenses – Because miscellaneous expenses must exceed 2% of adjusted gross income (AGI), look for ways to pay deductible expenses in 2014. In addition to unreimbursed vehicle and travel expenses, pay legal and/or tax-prep fees due now or in advance.
- Schedule medical procedures – Medical expenses must exceed 10% of AGI (7.5% for age 65+). If you are close to meeting the deductible threshold, schedule and complete procedures prior to year-end. Or, delay procedures into 2015 if you have a better chance of meeting the deductible amount next year.
- Anticipate taxes
- Offset capital gains – If you know you’ll incur capital gains, look for ways to offset the gain by selling stocks that have unrealized losses. (You must wait to repurchase the stocks until 30 days after selling the stock.)
- Check your withholding amount – Avoid underpayment penalties by making sure that you have paid estimated taxes due on salary, bonus, or commission payments.
Going forward, determine if it will help you to enroll in Health Savings Accounts or Flexible Spending Accounts during insurance open enrollment. It’s another way to use pre-tax dollars for expected medical or dependent care expenses. And when things settle down after the first of the year, it’s a good time to do a check up on your estate. Make necessary changes to your will, powers of attorney and health care proxies.
For more information, contact your Salmon Sims Thomas tax advisor.