The good news, you had a great year and earned a high income. The bad news, here comes the tax man. This is a perilous time of year for high income earners. If you procrastinate with your tax decisions, you could face a much higher tax bill in April 2015.
It is not too late to take some end-of-year steps to reduce your tax bite.
Below are a few tactics you can deploy to reduce or delay some of your taxes for this year. If you want complete advice on how to best plan your taxes and you live in the Washington DC area, please contact us.
We provide a free tax review for new clients. Even if you are happy with your current accountant or financial advisor, we are happy to provide a free tax second opinion
1. Defer your income.
With a newly-elected congress, tax reform may be on its way. You could face a lower tax rate next year. If you don’t need money at the end of the year, look for ways to delay some income to 2015. If you are self-employed, you can delay invoicing for work until the end of December or early January. If you get a w-2, you could ask for a year-end bonus to come in January rather than December.
2. Accelerate deductions, but be aware of AMT.
If you own an S-Corp business, you can purchase equipment to reduce your reportable income from the company. This equipment can be computers or a heavy work-related vehicle (6,000 lbs or more).
You could pay your January mortgage in December or pre-pay estimated state income and real estate tax. Just be careful of the alternative minimum tax (AMT).
Congress passed this tax to make sure the very wealthy do not avoid taxes by taking excessive deductions. The AMT is now increasingly affecting the middle class. You must compute AMT separately from your regular tax liability and the tax carries different rules.
You have to pay whichever tax bill is higher. Currently, some expenses, which are deductible under normal tax regulations, are not deductible when you compute your AMT. As an example, state and local income taxes and property taxes are not deductible under AMT.
So don’t prepay those items if you are subject to AMT regulations. Not sure if this applies to you? Contact us if you live in the greater Washington DC area. We are happy to review your issue at no charge.
3. Harvest your investment losses.
November and December are great months to harvest any losses by selling your loosing positions in stocks or mutual funds. Losses can offset your gains dollar for dollar. If you have more losses than gains, you can use up to $3,000 in excess losses to reduce your reportable income. You can also carry over any losses, which exceed the $3,000. You can carry over losses year-after-year until your gains fully offset the loss.
4. Use the annual gift tax exemption.
You can give up to $14,000 to as many people as you wish and the amount increases to $28,000 if you and your spouse both make gifts.
Note: if you give money, you cannot deduct the gift from your Federal income tax. You can give income producing stocks and the income the stocks produce will go to the recipient not to you.
Just be aware of the “kiddie tax.” Congress passed rules to prevent parents from shifting taxable investments to young dependents (children under 19 or full-time students under 24). For 2014, the IRS taxes investments above $2,000 owned by those dependents at the parent’s tax rate.
5. Contribute to a tax-advantaged savings plan.
This is a great time of year to max out contributions to your tax-deferred retirement accounts. For 2014, the max contributions are:
$17,500 for 401(k)s ($23,000 for folks 50+)
$5,500 for an IRA (and $1,000 more for folks 50+)
$12,000 for a SIMPLE IRA ($14,500 for the 50+)
If you are self-employed the best plan for you might be a Keogh plan, which you must set up by Dec 31. You can make contributions prior to April 15 as long as you establish the account by the end of the year.
6. Establish and Health Savings Account (HSA)
If you are self-employed or have a high-deductible health insurance plan*, you can establish an HSA. You can deduct 100% of your HSA contributions from your gross income. For 2014, the HSA contribution limits are:
$3,300 for individuals ($1,000 for 50+)
$6,550 for families ($1,000 for 50+)
*Note: To qualify for an HSA, your insurance plan must have a minimum deductible of $1,250 for an individual and $2,500 for a family
7. Pay College Early.
If you have a dependent in college, you could pay January’s tuition in December.
Under the American Opportunity Credit, parents can deduct 100% of the first $2,000 and 25% of the next $2,000 (with a maximum credit of $2,500. You can make this claim for each eligible under-graduate student.
8. Give to charity.
You still have time to give to charity. You can deduct the amount of a charitable contribution up to Dec 31, 2014, provided that you mail your check or charge to your credit card by that date. The IRS does limit how much you can deduct in charitable contributions. In most cases, you can only deduct charitable contributions up to 50% of your adjustable gross income.
If you wish to discuss your tax reduction options before Dec 31, 2014, and you live in the Washington, DC area please contact us.