Most people do not want to think about taxes during the holidays. However, when we ring in the New Year it will be too late to take advantage of many 2014 tax breaks. It definitely is worth your while to take a little time before Dec. 31 to squeeze in specific tax reduction strategies that will save you money when you file your return in 2015.
Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. For 2014, and looking ahead to 2015, individuals and businesses need to be ready for late tax legislation and prepare for a rash of new requirements and responsibilities under the Patient Protection and Affordable Care Act.
We've outlined some tax planning ideas for individuals that might be applicable to your situation. However, you should consider engaging a financial professional to discuss your specific circumstances in order to minimize your overall tax liability.
Postpone income. Delaying income until 2015 and accelerating deductions this year can lower your 2014 tax bill. By doing so you may be able to claim larger deductions, credits and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI) including: child tax credits, higher education tax credits, and deductions for student loan interest. At the same time, it might be better to accelerate income into 2014. For example, if you plan on purchasing health insurance on a health exchange and you're eligible for a premium assistance credit, then a lower income in 2015 will result in a higher tax credit. It really depends on your situation. If you are subject to alternative minimum tax in 2014, certain deductions, including taxes, are not deductible and therefore should not be accelerated. Reducing your adjusted gross income by postponing income will reduce alternative minimum tax.
Net Investment Income (NII) Tax. The threshold amounts for the NII tax are $250,000 for joint, $125,000 for a married taxpayer filing separately, and $200,000 in any other case. It's important to monitor all of your net investment income to see if you are liable for the NII tax. NII includes more than just capital gains and dividends; it also includes income from a business in which you are a passive participant. Rental income might also be considered NII unless it's earned by a real estate professional. To minimize the potential NII liability, consider strategies that will reduce your income below the thresholds listed above if possible.
Take advantage of zero tax rate on capital gains. The maximum federal income tax rate on long-term capital gains for 2014 is 20 percent. If your taxable income (including the gain) falls within the 10 percent or 15 percent tax brackets, you don't have to pay any tax on the capital gains. You should review your portfolio assets and determine whether you should act before the end of the year.
Realize losses. If you have incurred net capital gains this year, consider selling investments that would generate capital losses prior to December 31. This will allow you to reduce your overall tax bill.
Charitable gifts of appreciated stock. You can boost your charitable contributions by donating stock or mutual fund shares instead of cash. By doing so, you get to deduct the fair market value of your shares and permanently avoid income tax on the capital gain. In turn, the organization or charity you contribute to will receive the full amount. You need to have owned the stock for more than a year in order to deduct the fair market value and you can only deduct up to 30 percent of your adjusted gross income.
Estate and gift taxes. The maximum federal unified estate exclusion amount for 2014, as adjusted for inflation, is $5.34 million for gifts made and estates of decedents dying in 2014. In addition, you can give up to $14,000 in cash or other property completely tax-free to as many individuals as you want - and it doesn't count towards the lifetime exclusion. If you're married, you and your spouse can each gift $14,000 raising the annual maximum exclusion to $28,000.
These are just some of the year-end steps you can take to minimize your overall tax liability. There may be more opportunities if Congress acts quickly to reinstate the tax extenders for individual taxpayers including the state and local sales tax deduction, special mortgage debt forgiveness provisions, higher education tuition deduction, IRA distributions to charities, and teachers' classroom expense deduction. Take the time to meet with your financial advisor so you can act appropriately before Dec. 31.
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