Make Your 2014 Year-End Financial Moves Now
You’re making time to shop, you’re making time to bake goodies and you’re doing everything you can to prepare for your time off of work or school, but have you considered year-end tax deadlines? While preparing for these year-end tax deadlines isn’t as “cool” as shopping, assuredly, it’s just as important.
While filing your taxes doesn’t become due until April 15th, there is a laundry-list of tax-related decisions that must definitely be made before the end of 2014 or they won’t apply to your 2014 tax returns. Below, we are providing a list of 11 year-end tax strategies to assist in limiting your taxable risks.
1. Defer Income: In an effort to reduce your 2014 tax burden, defer the income until 2015. This especially makes sense if you’re self-employed and if so, wait until the end of December to issue invoices. Waiting to send out invoices until later in the month will assure that you won’t receive payment until the next year and therefore, won’t have to pay taxes on that income until the following year. Expecting a big year-end bonus, tell your boss to delay the bonus until after January 1, 2015.
2. Charitable Donations: Get all your charitable donations in before the end of the year in order to claim them on your 2014 tax returns. Keep in mind that if making these donations via credit card, you can do so as late as 11:59 p.m. on December 31st for them to count in 2014. Claim it in 2014!
3. Sell the Losers to Offset the Winners: Do you have some bad investments in your portfolio? Do you have some winning investments? Referred to as “loss harvesting,” selling your bad investments to offset the profits from your winning investments is definitely something you should do BEFORE December 31, 2014. Capital gains are calculated by the IRS on a net basis year to year, so if one investment made a profit of $10,000, you can easily avoid paying taxes on a losing investment of $10,000. Capital gains taxes can be as high as 39.6%, so selling these losers is a great way to keep what you have earned in the winning investments.
4. Pay Taxes Now: Whether your taxes are due in 2014 or 2015, if you pay the 2015 taxes in 2014, you are entitled to a deduction in the year you actually paid the tax. Property taxes and estimated state taxes can be deducted on a federal tax return. In some cases, if you prepay your estimated taxes before April, you might be able to deduct that tax payment in 2014.
5. Prepay School Tuition for Spring 2015: The government allows you to deduct up to $4,000 from your taxable income through tuition payments and according to the IRS, this can include tuition for 2014, but also classes that will begin before April 1, 2015. This may be helpful to individuals who started higher education in the fall, are below the $4,000 threshold, but will be continuing education in January.
6. Gift Giving of up to $14,000: If you have the means and you want to reduce your estate tax liability, give the individual heirs of your potential estate up to $14,000 each calendar year. Slowly paying down the wealth to these relatives helps to reduce the tax burden upon death and is tax-free for you. If you have the ability, make these gifts before December ends.
7. Spend Down Your Flexible Spending Account: Your FSA, or Flexible Spending Account, are financial vehicles for putting your pretax dollars meant for qualified medical expenses and child care. These FSAs are typically offered through your employer and are a great way to reduce taxable income, but if you don’t use it, you lose it. In other words, try to schedule medical procedures and appointments before the end of the year or the funds may disappear.
8. Invest to the Max on Your 401(k): The maximum contribution that can be made into a 401(k) for 2014 is $17,500. Any deposits you make into this account can offset your taxable income for the year you make the deposit. The downside, since the money for this purpose must be taken out directly by your employer, the only way to catch up at such a late date in the year is to significantly increase payroll deduction from now until the end of 2014. If you can handle it, do it.
9. Buy Health Insurance: As you may or may not know, the Affordable Care Act, a/k/a “Obamacare,” requires every individual to have health insurance in 2014 or face a maximum penalty of $285 or up to 1% of your annual household income. If you haven’t been covered for much of 2014, it’s too late to avoid all of the penalty. But getting insurance now could reduce your burden — and most importantly, ensure you’re insulated from higher penalties in 2015. Next year, the maximum penalty is $975 per household or up to 2% of total income, whichever is greater.
10. Adjust Your Withholding for 2015: Stuck with a big tax bill in 2014? Don’t wait to reset the withholding requirements in your paycheck, but adjust your tax burdens in December that will take effect on the first of the year. Avoid the oversized tax bill in the following year by beginning to pay the withholding after New Year’s Day.
11. Take our Your Required Minimum Distributions: Are you 70.5 years or older? If so, the government requires that you draw down your tax-sheltered retirement plans, like an IRA by required minimum distributions every year. The IRS requires you take these distributions and if you don’t withdraw the minimum amount, you may be penalized as much as 50% on the sum you should have withdrawn. Inquire with your tax professional to understand the details about your specific RMD. Required minimum distributions can vary based on age and how much you have saved.
Be prepared and take action now. December 31st is right around the corner and you shouldn’t wait until the eleventh hour. We highly recommend that you consult with your tax professional to ensure that you are doing all that you can do to take advantage of every tax benefit out there. Make your 2014 tax return a delight, not a fight.
Khila L. Khani, Esq.