Before the end of the year, all it takes is a few easy steps to maximize your tax savings. Then come April, you’ll be thanking yourself.
With the holidays right around the corner, you’re probably already strategizing about your shopping, whether for gifts, food, or decorations. There’s a good chance you’re also thinking about how to keep the family peace this year. One thing that is not likely on your mind is taxes.
Of course, thinking about taxes seems onerous when you would much rather focus on festivities. But if you make a few smart moves now, before the end of the year, you can help reduce your 2014 tax bill.
Set up a system if you don’t have one in place. Today, start organizing your receipts and records for any expenses that might qualify for a credit or deduction.
Plan donations to get deductions. When donating household items or clothing to a charity, get a receipt. If the donated value or cash value is more than $250, you need to have a receipt or a letter from the charitable organization to prove that you made the contribution.
Use free online tools, such as itsdeductible.com, to help calculate the value of some donations, recommends Kevin Gallegos, a vice president with the Freedom Financial Network, which specializes in consumer credit advocacy. Summer and fall are great times to clean out closets and make donations.
Plan to spend flexible spending account (FSA) dollars. An FSA can reduce your tax bill by letting you use pretax dollars for medical care and/or child care. If you don’t use the money in your account by the end of the FSA year, you lose it. An individual may contribute up to $3,300 per year; a family, $6,550.
Next, look at your 2013 return. “What worked well and what didn’t?” asks Mark Luscombe, principal analyst in the tax and accounting group with CCH, a provider of tax and accounting information. “Were there deductions or credits you should have gotten but didn’t? Adjust accordingly.” If you got a big refund, don’t pat yourself on the back. “You should have a low refund,” Luscombe says. “Otherwise, you’re giving the government a big loan. If you got a big check on your 2013 taxes, talk to your employer and make adjustments. Get more money in your paycheck.”
Think about what has changed in your life and how that might impact your taxes. Did you get married? Have a baby? Did your child graduate from college and stop being a dependent? Did you buy or sell a house? “By getting married, you now face different tax brackets and tax rates depending on how much your spouse makes,” says Steven Elwell, vice president at Schroeder, Braxton & Vogt, financial advisors. “You may phase out or now qualify for tax breaks that you didn’t before. Also, having a child increases your tax exemptions, and you may qualify for the child tax credit worth up to $1,000.”
Estimate your income for 2014. Look into deferring bonuses or large receipts to 2015 if this will not put you in a higher tax bracket next year or cause any phaseouts of itemized deductions or personal exemptions, advises Tim Gagnon, assistant academic specialist of accounting at the D’Amore-McKim School of Business at Northeastern University. Bunch miscellaneous itemized deductions into this year.
Max out your retirement plan
Deductible contributions to traditional IRAs and pretax deferrals to employer-sponsored retirement plans such as 401(k)s save taxes in a couple of ways. They reduce your taxable income, and thus your income taxes, for the current year. Second, they reduce your adjusted gross income.
If you’re under 50, you can stash $17,500, income tax free. Those 50 and over can go as high as $23,000 in their employer’s plan.
Make the most of medical bills
Beginning in 2013, the threshold for deducting medical expenses went up from 7.5 percent of adjusted gross income to 10 percent (unless you’re 65 or older). “You can deduct only expenses that exceed that floor,” says Harriet Greenberg, a partner with the accounting firm Friedman LLP. One way to reduce taxes, even if your expenses don’t exceed the floor, is to contribute to a tax-advantaged health care account, such as an FSA or health savings account (HSA). Contributions are pretax or tax-deductible, and withdrawals used to pay qualified medical expenses are tax-free.
If an HSA or FSA isn’t an option, or won’t cover all your medical expenses, take a closer look at the medical expense deduction. Deductible expenses may include health insurance premiums (if not deducted from your wages pretax), long-term care insurance premiums (depending on your age), medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account), and mileage driven for health-care purposes (23.5 cents per mile).
“You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor,” says Greenberg.
Know, too, that medical expenses such as prescribed acupuncture for smoke-cessation purposes, weight-loss program treatments (for obesity as diagnosed by a doctor), and even fertility enhancement can qualify for deductions, says Denise Frazier, a CPA with Cooper CPA Group.
Leave nothing on the table
Many more people than in the past are working from home. If you use part of your home for business, you may be eligible for the home office deduction. “The new, simplified option allows you to take a deduction of up to $1,500 based on $5-per-square-foot dedicated office space, up to 300 square feet,” says CPA Gregg Wind.
If you paid someone to care for your child (or spouse or dependent) so that you could work or look for work, you may be eligible for the child and dependent care credit of up to 35 percent of qualifying expenses. Depending on your adjusted gross income, you can claim up to $3,000 for the care of one person and up to $6,000 for the care of two or more, says Wind.
Meanwhile, the Affordable Care Act provides a tax credit to taxpayers who obtain a quality health-care plan. When you purchase a health-care plan, the credit is typically received as a subsidy paid by the government directly to your insurance company in order to lower your premium. However, it is important to note that you can also choose to claim this tax credit when filing your income tax return. You can find out more at irs.gov/uac/The-Premium-Tax-Credit.
If you volunteer for a charity, deductions are permitted for out-of-pocket expenses. For example, if you use your car while performing services for the charity, you may deduct a flat 14 cents per mile, plus tolls and parking.
Review investment income
This year, the capital gains rate for the top income bracket (39.6 percent) for individuals with taxable income over $400,000 ($450,000 for joint filers) is 20 percent. If you’ve realized or expect to realize significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait 31 days to avoid the “wash sale” rule, says Harriet Greenberg.
If you have appreciated stock that you are thinking of selling, consider transferring the asset to your children who are not currently your dependents, advises CPA Gail Rosen. To the extent that their taxable income would be taxed at a regular rate of less than 25 percent (for 2014, taxable income of no more than $36,900 for single returns), they can take advantage of the 0 percent rate for net capital gains.
Consider adjusting your portfolio to buy stocks that pay qualified dividends. These dividends are taxed at the maximum capital gain rate of 15 percent (20 percent for those in the top ordinary income tax bracket).
If you’re a big income earner, analyze whether you should increase your allocation to tax-free municipal bonds and bond funds, says Gail Rosen.
The worst mistake you could make is to give in to inertia. Push thoughts of turkey and mistletoe aside temporarily. You might also want to have preliminary discussions with your tax preparer. DW
Sheryl Nance-Nash is a freelance writer specializing in personal finance, small business, and general business.