5 Tax Planning Strategies to Close Out 2014
We’re in the final stretch of 2014. Although you may be preoccupied with an upcoming vacation or time with family, there are some year-end tax planning strategies that can lead to considerable savings when April comes around. Here are five to consider before the end of 2014.
Invest more in your retirement plans
One use of extra savings is to put more money into a retirement plan like a 401k or a Traditional IRA. Your contributions into these accounts are tax deductible so you’re lowering your tax bill today while putting money aside for retirement down the road. For employer-sponsored plans like a 401k, contributions must be made before the end of the year to get a deduction for 2014, but for an IRA, you have until April 15th. Just be sure you haven’t already hit the annual limit – if you’re under 50 years old, only $5,500 can be put in traditional and Roth IRAs combined. Also, pay attention to the income limits for Roth IRA contribution eligibility – if you are coming close to the limits, it may make sense to prepare your 2014 taxes first so you know what your Adjusted Gross Income will be before making the 2014 contribution.
Shift your income
For some, it may make sense to defer a portion of compensation until 2015, where possible. For example, you might have the option to take a bonus this year or postpone it until 2015. If you’re going to be in a higher tax bracket this year, try to postpone income until next year. If you’re going to be in a lower tax bracket this year realize the income in 2014.
Add to your flex spending account
If your company offers a flex spending account as a benefit, you can also lower your taxable income by contributing to these accounts. FSAs are funded with pre-tax dollars, so they reduce your gross taxable income. You can use the account to pay for certain types of qualified expenses like medical bills or childcare. Just make sure to plan ahead because in some FSAs, your account balance is forfeited at the end of each plan year.
Claim investment losses
Being strategic about when to sell an investment and realize a loss, can be an important factor in your annual tax planning. First, a loss will help offset taxes on any investment gains you made for the year. If you’re at a net loss for the year between both short and long term investments, you can deduct up to $3,000 from your investment losses against your ordinary income. The remainder can be carried forward as a deduction in future years.
Give more to charity
Donating to charity is a kind gesture and can lower your taxable income taxes. Your donations to charity are tax deductible, but you can deduct more than just cash gifts to charity. If you have appreciated securities in a brokerage account, you can donate the securities directly to a charity, taking a deduction for the fair market value on the date of the gift while avoiding capital gains taxes. Gifts of clothing, food, supplies, and any other materials a charity needs are also deductible, though you need to document your donations carefully.
When it comes to taxes, a little year-end planning can make a big difference. Taking the time to review your plan this December could pay dividends come April.