Tuesday, October 28, 2014

2014 Smart Tax Moves

You may be able to save a substantial amount on your taxes if you take the appropriate steps now. With the end of the year approaching quickly, smart tax planning can help you reduce the taxes you’ll owe on April 15th.

Give to Charity

Not only is the holiday season a great time to give to charity, but these donations could add up to a significant tax deduction. You must, however, itemize any donations that you make to charity – including any clothing or household items.

Thinking about donating more than $250 cash to charity? Hang on to your canceled check as a receipt– and have the charity acknowledge your donation.

If you’re considering donating your car that is worth more than $500 to charity, you deduction may be limited to the amount the organization is able to sell it for. However, you may be able to claim a larger deduction based on the car’s fair market value.

Review Your Portfolio

If you are thinking about selling appreciated securities or other assets, doing so by end of year will save you money. You should never allow your taxes to dictate your portfolio strategy, but if you are already planning on selling some assets, doing so by the end of the year would be wise.
Gift to Family Members

You can gift up to $14,000 to as many individuals as you would like up to December 31st without filing a gift tax return. Married? You and your spouse are able to give up $28,000 per individual.

Convert to a Roth

Unlike withdrawals from your traditional IRA, Roths are tax-free and penalty-free if you are over 59 ½ and the converted account has been open for at least five years. If your income is expected to increase, you may consider opening a Roth vs. a traditional IRA for these tax benefits.

Clean Out Your Flexible Spending Account

Last year, the Treasury Department changed the rules so that companies could allow employees to carry over $500 in their medical flexible spending accounts (FSAs) from one year to the next. If your employer will not rollover your balance, then you may need to focus on spending the money in your FSA before the end of the year, or risk losing the balance in your FSA.

Ensure Your Return is Penalty-Proof

Avoid an underpayment penalty by boosting your withholding now. If you expect that you will owe on your 2014 tax return, you may prepay 90% of what you think you may owe in the spring. This will ensure that you do not get hit with an underpayment penalty.

Plan Your Itemized Deductions

If your income is expected to drop next year, your deductions will become more important this year. In this case, you will want to pay deductible expenses before near end. Conversely, if you expect your income to increase, hold off on making any charitable contributions or any other deductible expenses, as these will be more valuable if paid in 2015.

Giving Large Amounts to Charity

If you are planning to give a significant amount to charity this year, it may be a good idea to give appreciated stocks or mutual fund shares. This will boost your savings on your tax return. Instead of the contribution deduction being worth how much you paid for the asset, the charitable contribution deduction will actually be the fair market value of the securities on the date of the gift. And, you’ll never have to pay tax on the profit.

If for some reason the charity that you are planning to give to does not accept donations of securities, you may want to open a donor-advised fund instead. Contact our office today to learn more about these funds.

Give Securities

Consider shifting your income to you parents or children by gifting securities. If your parents or children fall in the 10% to 15% tax bracket, they may qualify for the 0% tax rate on long-term capital gains. For assistance with gifting securities to family members to take advantage of tax breaks, please contact our office.

Add to Your 401 K

Any money that you contribute to your 401K by the end of the year will help lower your tax bill, since it lowers your income. Now is the time to direct any extra dollars to your 401K, if you haven’t already maxed out your contribution for the year.

Withhold More from Your Refund

Americans like receiving a large lump of money each tax season – we are addicted to refunds. This is basically giving the government a loan each month, as your taxes are deducted from your income, and then disbursed during tax season. Wouldn’t you rather earn your income as you are working?

To fix this, simply file a revised W4 Form with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld.

Mutual Fund Purchases

It is important to be aware of the tax trap of end of year distributions in mutual funds. Most funds save the bulk of their capital gains and dividend payouts until the end of the year. On a certain day in December, these payments are made to shareholders. Therefore, you are required to pay taxes on these distributions, even if you’ve only owned the funds for a few days.

For more information about any of these smart end-of-the-year tax moves, please contact our office today.


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