10 End-of-Year Tax Tips

Are you worried about paying too much in taxes this year? If you wait until you file next year, it will be too late to do much about it. As the 2014 year winds down, you’ll want to note some simple things you can do to reduce the amount of income tax you owe Uncle Sam this year, while planning for the year to come. 

1. Accelerate Deductions and Defer Income

You don’t have to wait until 2015 to pay for things like state and local income taxes, interest payments and real estate taxes. Instead, you can make payments before 12/31 and take the deduction in the current tax year. Just remember, if you take the deduction this year, you can’t use the same payment for a deduction next year (although you can use the same technique next December).

If you are eligible for a large year-end bonus, why not ask your employer if you can have it paid out after the New Year? That way it won’t be considered taxable income until next year.  You can do the same with income generated from consulting gigs or self-employment. This may NOT be a good idea if you are expecting a large amount of taxable income next year, so be prudent.

2. Bunch Itemized Deductions

Take a moment to look over the Schedule A and see if there are any deductible expenses that can be incurred in the current year.  For example, if you have had a large number of unreimbursed medical expenses and you’re expecting to have more in January, see if you can move up your appointments to December.  If you’ve had a lot of unreimbursed business expenses, consider adding a few more before the year closes out. Just remember that some expenses are not deductible until they exceed a certain amount, so be sure that your total will eclipse this threshold before you attempt to apply this strategy.

3. Make up a Tax Shortfall with Increased Withholding

If you’ve had a change in marital status, a change in the number of dependents in your household, or a substantial change in income, you may have had too much or too little income tax withheld this year.  Run an estimate of your tax liability and compare it to how much tax you have paid either directly to the IRS or through withholdings.  If it doesn’t look like enough, make extra payments now while there’s still time. It may not save you from an underpayment penalty for prior quarters, but it should help for the last quarter.

4. Leverage Retirement Account Tax Savings

If you have access to a qualified plan through work then you are eligible to contribute up to $17,500 for the year (plus an extra $5,500 if you turned age 50 or older this year).  If you have not reached this limit yet, contact your payroll department to see about making a special “end-of-year” contribution.  You can also contribute to a traditional IRA (which is deductible if your income is low enough), but you have up until April 15, 2015 to make that contribution so you don’t have to be in as much of a hurry.

5. Reconsider a Roth IRA Rollover

Any funds you roll from a traditional IRA to a Roth IRA are treated as taxable income for the year, but if you just realized that this will push your income into a higher tax bracket then you may want to undo this transaction.  This procedure, known as recharacterization, must be completed before your tax filing date, including extensions.

6. Leverage State and Local Sales Tax Deduction

Taxpayers that itemize their deductions have a choice between taking a deduction for state income taxes or for state sales taxes.  If you live in a state that does not have a state income tax or if you’ve made (or are planning to make) some big purchases this year, you may benefit more from the sales tax deduction.  The IRS provides this calculator to help you estimate your sales tax deduction for the year.

7. Don’t Squander Your Gift Tax Exclusion

Any taxpayer may give cash and noncash gifts totaling up to $14,000 in value to as many people as they wish without incurring a gift tax in 2014.  (Couples can combine their gift and give up to $28,000 per recipient.)  If you have a sizeable estate and are feeling extra jolly this year, be sure to take advantage of this annual tax break.

8. Understand the New Home Office Deduction Safe Harbor

Taxpayers that work from home may be eligible to use a simplified method for computing their home office deduction this year.  Under the simplified method, taxpayers may deduct $5 per square foot on up to 300 square feet of home office space, for a maximum deduction of $1,500 per year.  To qualify, the space must be considered your principal place of business and be used exclusively for work.

9. Maximize “Above-the-Line” Deductions

Technically adjustments to income, above-the-line deductions are a great way to reduce your taxable income without the requirement to itemize.  Some of the more common deductions include traditional IRA and health savings account (HSA) contributions, moving expenses for a job relocation, self-employed health insurance costs, and alimony payments.

10. Perform an Overall Financial Wellness Assessment

As the year winds down, now is the perfect time to perform a financial wellness assessment.  Ask your employer if they offer an online financial wellness assessment as part of your employee-benefits program.  If not, you can use this Financial Health Assessment to see how you are doing in the area of cash management, along with this Personalized Action Plan to achieve your goals in the upcoming year.

As my boss always likes to say, financial planning is a process, not an event. The same is true of tax planning. Begin the process today so that you can have a happy and prosperous tomorrow.

 

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