With two weeks before we close out the year, you still have time to take action to reduce your tax bill. After all, we all know it’s not what you earn but what you keep and by actively planning to save tax dollars, you can keep more.
- Consider paying your home’s property taxes by Dec. 31. If you itemize, you can deduct that amount on your tax return. Of course, that means you won’t have the deduction for next year, unless you pay your real estate taxes early again in the following year.
- Sticking with your house, this time it’s your mortgage payment you might want to make early. By getting the payment to your lender by the end of the year, the interest on that payment can be deducted on this year’s tax return. And making sure the payment is received by December 31 will ensure that there’s no explaining to the IRS why you’re deducting more interest than your lender shows on Form 1098 that you paid in the current year.
- Donate to your favorite charity. I realize you already spend a lot on gifts for family and friends. But, if you have excess cash, consider sharing it with those who are less fortunate. Not only is it a great way to get in the Holiday spirit, if you itemize you can deduct your charitable gifts. It doesn’t have to be cash. Most charities will take household goods (that are in good shape!) or even vehicles. Make sure to get a receipt from the charity that states you received nothing in return.
- Give more to family and friends. If you have a large estate, you can reduce potential future taxes by giving away up to $14,000 to anyone you want. The gift can be cash or assets valued at $14,000 or less during the calendar year. And there aren’t any gift tax issues for you or the very exhilarated recipient(s).
- Dump losing stocks. If you had a few holdings that didn’t do well at all this year, now might be the time to get rid of them. You can offset your earnings with the losses up to $3,000 of income and maybe trim off some capital gain income.
- Invest in your future. Take advantage of a 401(k) or 403(b) plan offered by your employer. The funds you invest in these plans are pretax. You will defer taxes until you start receiving distributions. If you qualify you can make contributions to your own traditional individual retirement account or to a Roth IRA. With a Roth, you will be contributing with after-tax funds, but your withdrawals will be tax-free.
- Go for a health tax break. If you have a Health Savings Account (HSA) be sure to fund it and take the tax deduction. HSA can accumulate tax-free income for use later in life and/or be used to pay for current medical expenses. For people with few medical expenses, HSAs have the effect of getting a deduction up-front on page one of Form 1040, rather than as an itemized deduction for medical expenses with the potential to save more tax dollars. Those after tax dollars withheld from your paycheck to cover your portion of health insurance are often an overlooked itemized deduction. There are instances where they might not be deductible for federal taxes (10% medical of AGI for those under age 65) but are for state taxes.
- Make miscellaneous payments. Costs such as union or professional dues, job related educational expenses, and subscriptions to business publications are deductible as itemized expenses as long as you have enough of them. Your total miscellaneous expenses must exceed two percent of your adjusted income before you can write them off. If you’re near that number, extend that subscription and make other payments to get over the deduction hurdle.
- Fill out a mock tax return. Yes, it’s bad enough filling out a 1040 when you absolutely have to but… if you do at least a test run now, it could save you a bad surprise. You might find you’re going to owe more than you expected and can start planning now to handle the problem. Or you can ask your boss to withhold a few extra dollars from your final 2014 paycheck to cover the shortfall and prevent or at least reduce any potential underpayment penalty.
- Adjust your withholding. Regardless of what you find when you do your tax return dry run, you might want to tweak your payroll withholding. Some folks view their annual tax refund as a forced savings account. If that’s the only way you can save, then it’s better than nothing. But if you’re having too much withheld, you might want to consider getting the money each payday. Just give your boss a new W-4.
- Don’t be shy. Many people are uncomfortable asking questions and often pay more tax than they need to because of it. Don’t guess. We can help you determine how the tax law applies to your specific situation, including whether you qualify for one or more of the special provisions in the tax code.
- On a humorous note: Be sure to make your tax appointment for the coming season. When you visit your accountant, please bring your best wine (not whine). Start organizing your tax information as soon as you can. The more organized you are, the less wine your accountant will need! ☺