Last Minute Moves to Save on Taxes for 2014
December 22, 2014I have never been a big fan of shopping during the busy holiday season, where we are all encouraged to buy, buy, buy no matter where we turn. In fact, I personally prefer to do my shopping in the convenience of my home office and avoid the consumer-driven hustle and bustle as well as the traffic. Click, click, done!
If you actually enjoy seeing, touching, and enjoying the holiday shopping experience in person, I can also understand the potential joys associated with getting away from the computer or smart phone. Growing up before the days of the Internet and when phones were wired, we had a little family tradition that involved a last minute trip to the store for Christmas stocking stuffers and the occasional impulse bonus purchase all in the spirit of giving. While it’s easy to get too distracted by work, children’s activities, holiday parties, travel, etc. to knock everything off the holiday to-do list and no matter how much fun these traditions may seem, it’s usually not too wise to wait until the last minute to shop.
Our financial planning checklists face the same challenges of time and unless we prioritize these items into our busy schedules, they can easily be neglected. Never fear though. Here is a list of some last minute financial planning items that can help improve your financial well-being and help save you some money on taxes in the process.
Save more for retirement. If you contribute to your employer sponsored retirement plan through work, you will reduce your taxable income by the amount you contribute. If you qualify to make a deductible contribution to an IRA, you can further reduce your taxable income. You can make an IRA contribution by April 15, 2015 for tax year 2014. Check out this How to Decide Which Type of IRA to Invest in guide for more information on choosing between a traditional or Roth IRA.
If you are in a high deductible health plan, increase your HSA contributions. Health Savings Accounts provide much needed protection to help pay for future health-related expenses. HSAs can also benefit you by lowering your income taxes. You can contribute up to $3,300 for individual coverage and up to $6,550 for family coverage for 2014. If you are age 55 or older, there is an additional $1,000 catch-up contribution until Medicare eligibility at 65. Just don’t forget to include contributions made by your employer during 2014 along with your contributions for the 2014 tax year when determining how much you can possibly add to your HSA. You have until April 15, 2015 to make additional HSA contributions for the 2014 tax year if you go directly through your HSA bank.
Balance or offset investment gains against losses on any securities you wish to sell. Investments held more than one year are taxed at more favorable long-term capital gains tax rates, while investments sold that have been held for one year or less after purchase are subject to the higher ordinary income tax rates. If you have capital gains to report for the year, consider selling other securities that may generate a loss. In addition, up to $3,000 of capital losses not offset by capital gains can be taken off ordinary income taxes annually. The remaining losses can be carried forward indefinitely.
Pay deductible expenses now. Review the eligible expenses reported on Schedule A in order to determine if prepaying deductible expenses during the 2014 calendar year makes sense for your situation. If you expect the sum of these expenses to exceed your standard deduction for 2014 (married/filing jointly: $12,400; married/filing separately and single: $6,200; head of household: $9,100), you may itemize deductions. You can pay some of next year’s deductible expenses before the end of the year to decrease your taxable income this year. The following are some examples of deductible expenses that may impact your tax return.
- Mortgage interest is tax deductible. Consider making your January mortgage payment in December to reduce this year’s taxes by creating a larger interest deduction.
- State and local income taxes can also be deducted on Schedule A. If you are making quarterly estimated income tax payments, you might want to make your last state income tax estimated payment in December instead of January. The same applies for property taxes due next year.
- If your medical expenses are going to exceed 10% of your adjusted gross income (AGI) you may be able to deduct them on Schedule A. (If you are age 65 or older, the threshold is 7.5%.) If you will be close to this amount, pay for enough of next year’s expenses now to put you over the 10% threshold, if possible.
- Consider making charitable contributions. Contributions of cash gifts up to 50% of your AGI and gifts of appreciated property up to 30% of your AGI may be deducted annually. For contributions that are not eligible for deduction in the current year because they exceed your AGI limits, it is possible to carry them over for up to 5 years.
- Self-employed individuals and business owners might consider purchasing equipment before the end of the year (and making other eligible Section 179-related expenditures).
In the spirit of the season, give yourself the gift of some extra tax savings by taking some last minute financial planning steps to reduce your tax bill. If there is not enough time or money to make these moves for 2014, you can go ahead and work these strategies into your financial plan for next year. In the meantime, have a Merry Christmas and best wishes for a prosperous New Year in 2015!!!