As 2015 rapidly approaches, there are still some year end tax planning strategies that you can employ to reduce your 2014 tax liability. Keep in mind that most of these strategies, but not all, come with a December 31 deadline, so don’t procrastinate.
1. Harvest your capital losses
Most financials advisors recommend that you review your portfolio at least quarterly. Right now is a good time to sell your losing investments that no longer meet your investment goals. You can utilize the losses generated to offset some or all of your capital gains incurred during the year.
In addition, you can take up to $3,000 of losses against ordinary income. Any losses that are not used can be carried forward and utilized in future years. However, don’t get blind-sided by the wash-sale rule that disallows a loss if you purchase substantially the same investment 30 days before or after the loss sale.
2. Maximize your retirement plan contributions.
You have until December 31, 2014 to fund your 410(k), 403(b), or similar plan offered by your employer. You can contribute up to $17,500 ($23,000 for those 50 or older) for the 2014 tax year. In addition to reducing your current year taxable income, any earning on your contributions grow tax deferred.
If you are eligible for a tax deductible IRA contribution, you have until April 15, 2015 to make a contribution of up to $5,500 ($6,500 for those 50 or older) for the 2014 tax year.
If you are self employed you may want to consider a Simplified Employee Pension Plan (SEP). You can contribute up to 25% of net income, or taxable wages by April 15, 2015, or the extended due date of your return.
3. Make a charitable contribution.
You have until December 31, 2014 to make a tax deductible contribution to your favorite charities. However, you are required to have a receipt from the charity for all contributions you make.
You may want to consider making a contribution of appreciated securities. You will be able to deduct the fair market value of the securities donated, but avoid paying any tax on the capital gains.
4. Make a $14,000 gift before the end of the year.
You can give anyone you like up to $14,000 ($28,000 if both spouses make a gift) with no reporting requirements. However, anything above the $14,000 ($28,000 for married couples) will require the filing of a gift tax return, even if no gift tax is due.
By making a completed gift, you are removing those assets from your estate, and helping to reduce or avoid estate taxes.
5. Accelerate your deductions into 2014.
If you qualify to itemize your deductions, you may want to consider paying some of your expenses now instead of 2015. This strategy works especially well if you anticipate being in a lower tax bracket in 2015.
January mortgage payments, property taxes, charitable contributions, and state estimated tax payments are examples of itemized deductions that can be prepaid. However, if you are subject to the alternative minimum tax you may not receive any benefit from accelerating certain types of deductions, so be sure to speak to your tax advisor.
6. Defer income into 2015.
If you are self-employed, or work as an independent contractor then you may have the option of deferring some of your income into 2015. Like accelerating your deductions, deferring income usually only makes sense if you anticipate being in the same or lower tax bracket in 2015.
This is not a comprehensive list of year-end tax strategies, and not everything mentioned will apply to everyone. I can help you determine what year end tax strategy would best fit your particular situation.