2014 Year End Tax Planning TipsSubmitted by Canty Financial Management on December 9th, 2014
2014 Year End Tax Planning Tips
1) Bunching of Income and Deductions: Tax Planning should take place with multiple tax years in mind. Try to compare your 2014 Income and Deductions with an estimate of how you think 2015 will turn out. Do you think your Taxable Income be higher in 2014, or higher in 2015? Once you determine the likely future direction of your income then you can employ some common Accelerating or Deferral Strategies that bunched into the year that will be most advantageous for you. This is only a brief summary of some tax planning tactics, and every situation is unique, so please call Canty Financial Management at 518-885-3230 to review your specific situation.
If your Income will remain similar in 2015, or if it is likely to drop lower in 2015, then you may want to consider Accelerating Deductions for 2014 and try to Defer Income into 2015.
Examples of Accelerating Deductions are paying Tax Deductible Expenses this year such as medical, property taxes, State Estimated Tax, or charity donations. You may also be able to increase your contributions to an IRA or 401k.
Examples of Deferring Income are asking your employer to pay out any bonuses in January 2015 instead of in December 2014. Another common income deferral strategy is to hold off on selling investments with gains until future tax years, and also holding off on IRA distributions.
If your Income will be higher in 2015 (compared to 2014), then you may want to consider Accelerating Income into 2014, and deferring Deductions into 2015.
Examples of Accelerating Income are asking your employer to accelerate bonuses into 2014 instead of 2015. Sell off investment with taxable gains in 2014 instead of 2015. Accelerate distributions from IRA or 401k plans.
Examples of Deferring Deductions are deferring deductions such as medical, property taxes, State Estimated Tax, or charity donations until future years. Consider funding a Roth IRA instead of a Traditional IRA.
2. Review your FSA amounts: Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees shift part of their pay into a special account to pay for child care or medical bills. The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess.
3. Sell Loser Investments to offset Gains: A key year-end strategy is called “loss harvesting” --selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during 2014. Losses offset gains dollar for dollar, and if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income. If you have more than $3,000 in excess loss, it can be carried over to 2015. You can carry over losses year after year for as long as you live.
4. Avoid the Kiddie Tax: Congress created the "kiddie tax" rules to prevent families from shifting the tax bill on investment income from a parent high tax bracket to the child’s low tax bracket. For 2014, the kiddie tax is imposed on a child's investment income above $2,000 at the parents' rate and applies until a child turns 19. If the child is a full-time student who provides less than half of his or her support, the tax applies until the year the child turns age 24. One way to avoid the Kidde Tax is to hold off on realizing Capital Gains on Investment Accounts. You are not taxed on growth on investments until you actually sell the investment and Realize the Capital Gain. In many cases its best to hold off on realizing the Capital Gain until the child’s age is over the Kidde Tax age bracket.