As the year comes to a close, it’s time to stop and evaluate your current financial position in preparation for filing this year’s taxes. A year-end review can present new tax-saving opportunities and various financial planning strategies. Take into consideration these expert tips for year-end tax planning before the New Year.
Your gross income is your total income before taking taxes or deductions into account. Estimating your 2014 income will help you implement appropriate strategies, contributions and deductions to minimize your tax burden before the end of the calendar year.
Your adjusted gross income is the number that your tax liability will be based on. Minimizing your adjusted gross income will help you keep more money in your pocket. For example, some deductions for next year may be applied to your gross income this year. In certain cases, your property tax bill for next year, medical expenses and some work related expenses may be deducted on your taxes for this year, thereby further minimizing your tax responsibility.
Maximizing contributions to an IRA or 401(k) will minimize your current year tax burden. The added benefits of added contributions are tax deferred growth of your money and an increased retirement savings fund. For 2014, for example, the 401(k) contribution limit is $17,500 (or $23,000 if you are 50 years old or older) and must be made by December 31, 2014. You may contribute $5,500 to your IRA (or $6,500 if you are 50 or older). You have until April 15, 2015 to finalize 2014 contributions to your IRA.
Through a strategy called Tax Loss Harvesting, you are able to balance your capital gains and losses to minimize the amount you will pay in taxes. If you have capital gains that fall outside your retirement accounts, you will be able to deduct investment losses against those gains. If your situation deems it necessary, you may carry $3,000 in losses into the following year.
Every itemized tax deduction you claim will help reduce your tax liability. There is a limit to the amount of itemized deductions you can take depending on your income level. For those taxpayers with an adjusted gross income greater than $250,000, if filing single, or $150,000, if married filing separately, working with a tax professional will help you get the most out of your allowed deductions.
When estimating your gross income for the calendar year, do not make assumptions. Review pay stubs or distribution notices to be sure you know your total income for the year.
Individuals may give a gift of up to $14,000 to as many people as they choose. Such gifts can help to reduce federal gift and estate taxes. Educational contributions such as funding a 529 plan or paying an educational institution directly may also affect estate taxes.
Many people have the option to defer income until the next calendar year. Year-end bonuses and commissions may be income that can be deferred. Take into consideration what you think your tax situation will be next year. If your gross income will increase dramatically in 2015, you may find yourself in another tax bracket. In this situation, deferred income may not be the best option.
Itemizing deductions is not in everyone’s best interest. There are limits on many types of deductions. Understand what can be deducted from your gross income. Unless the total of your qualifying expenses exceeds $6,200 if you are single, or $12,400 if you’re married and filing a joint return, itemizing your deductions would be a mistake.
Buying stocks isn’t free. You are subject to commissions and may also pay transfer fees if you change brokerages. These expenses should be added to the amount you paid for a stock when determining your cost basis. When you sell the shares, subtract the commission from the sale price of the stocks.
Procrastination rarely pays and there are ways to ensure that you take as many deductions as possible when the time comes to file your next tax return. Organization is key to keeping you up to date on your current financial position and will make year end tax planning an easier task. The sooner you get started managing your taxes, the more effective you may be. Additionally, it may be beneficial to work with a qualified tax professional to minimize your current year tax burden.
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