The vast majority of actions you can take to reduce your 2014 tax liability need to be done on or before Dec. 31. While there are a few exceptions, nearly everything that transacts after the end of the year will count only toward your 2015 tax scenario. Regardless of your financial situation, one thing applies to everyone: the sooner you start planning, the more effective your tax management strategy.
Below are four planning ideas to help you potentially minimize your 2014 taxes.
1. Charity – Charitable contributions made on or before Dec. 31 are deductible for that tax year. This is a classic tax reduction strategy for almost anyone who itemizes their deductions. Don’t forget to get receipts for every contribution you make.
Another charitable giving strategy is donating appreciated stocks or bonds. You are allowed to deduct the current market value of the asset and get to avoid paying tax on the capital gains.
2. Contribute to a tax-advantaged plan – For the majority of taxpayers, contributing to an IRA or 401(k) is easily the most productive move you can make. Contributions to such plans not only reduce your taxable income, but they also provide tax-deferred growth supporting your retirement savings goal.
The timing of your contributions depends on the nature of plan you choose. Contributions to common workplace qualified plans such as 401(k) and 403(b) plans to need to be made by Dec. 31 to qualify. As a result, you need to take action now to increase your deferral in order to see any 2014 benefits. Other plans such as Simplified Employee Pension plans (SEPs) and IRA plans give you longer to make your 2014 contributions. With an IRA or SEP IRA, you have until April 15, 2015, to make your 2014 contribution and still receive the tax benefits.
3. Annual gift tax exemption – Individuals can give up to $14,000 a year to as many people as they want to via cash, stocks, bonds or portions of real estate (married couples who file jointly can give a combined $28,000). Anything above this threshold could be subject to gift taxes. If you have a multi-year gifting strategy or are trying to reduce potential future estate taxes, consider giving at or near the maximum allowed.
4. Take your losses – No one wants investment losses, but if you are holding unrealized losses near year’s end, there might be ways to at least reduce your taxable income. Selling your losing investments allows you to take those losses and possibly deduct them. Selling losing investments – or harvesting investment losses for tax planning purposes – can get complicated. You can take only losses in the current year against gains you also realized in the current year plus $3,000. You need to factor in the short-term versus long-term nature of gains, whether or not you have any loss carry-forwards from prior years and wash-sale rules. Finally, all of this needs to be taken within the context of your overall investment strategy.
Conclusion – These strategies are just some of the ways you can plan ahead to potentially minimize your 2014 tax bill. Many planning strategies are interrelated, and making a move in one area can impact what you are allowed to do in another area. As a result, it is best to discuss tax planning with your tax professional.