If you’re like many people, you probably do not start thinking about taxes until next spring in anticipation of the April 15 tax-filing deadline. However, it would be wise to give a little bit of thought to tax planning right now — because there are some financial moves you can make before the end of the year that could end up saving you money when you file your 2014 tax return next April.
Consider these five year-end tax-planning moves you might be able to make before December 31, 2014, that could save you money on your 2014 taxes:
- Try to time your income and expenses. The general idea when it comes to timing income and expenses for tax-saving purposes is to defer the receipt of income from December until January, and accelerate the payment of expenses from January to December. These strategies could reduce the amount of your adjusted gross income (AGI) that is taxable this year, thus reducing the amount of tax you must pay.
Therefore, if you expect to receive a year-end bonus, for example, you could ask your employer to hold off until January 1 to pay it. Moreover, if you are self-employed, do not send out December invoices until late in the month to delay receipt of payment until January. Note that if you receive checks from clients before December 31, you are considered to be in constructive receipt of the income. This means you should pay taxes on it in 2014, even if you do not deposit the checks until January.
On the expense side, if there are any tax-deductible purchases you plan to make early next year, make them in December instead if you have the money. One strategy is to make your January mortgage payment before December 31. Also, consider making any upcoming charitable contributions in December, as well as paying any deductible property taxes before December 31.
When it comes to deductions, keep in mind that the amount of your itemized deductions phases out if your AGI exceeds a certain threshold. This phase-out starts at AGI in excess of $250,000 for singles and $300,000 for married couples filing jointly. If you think your AGI will exceed these thresholds in 2014, you might consider the opposite strategy: deferring the payment of deductible expenses into January so you can possibly deduct them next year.
- Determine your Alternative Minimum Tax (AMT) exposure. The AMT is a separate tax calculation in which adjustments are made for certain items to your taxable income. You must pay whichever tax is higher: your regular tax or the AMT. There is an AMT exemption for 2014 of $52,800 for singles and $82,100 for married couples filing jointly.
Crunch some numbers before the end of the year to try to find out if you will be subject to the AMT this year. If so, dig deeper to figure out which deductions, exemptions or exclusions are triggering the AMT and adjust them. If not, pre-pay your state income taxes before December 31 if you can to receive the deduction in 2014.
You might need to work with a CPA for help in this exercise. Just make sure you do so before year-end — after December 31, it will be too late to make any AMT tax moves.
- Make an additional contribution to your 401(k) plan. This move accomplishes two objectives: It helps boost your retirement savings, and it can also reduce your 2014 tax bill. Any money you contribute to your 401(k) plan before December 31 will reduce your taxable income for the year, and thus the amount of tax you must pay. You can contribute up to $17,500 to your 401(k) in 2014, or $23,000 if you are at least 50 years old, so strive to max out your 401(k) plan for this year by making an additional contribution before December 31 if you can.
Meanwhile, if you have a traditional IRA, keep in mind that you have all the way up until next April 15 to make a tax-deductible contribution for tax-year 2014. And if you are self-employed and have a SEP-IRA, you have until the due date for your 2014 return, including extensions, to make a tax-deductible contribution for tax-year 2014.
- Plan to avoid new ACA taxes. If you earn enough money, you may be subject to new taxes imposed by the healthcare reform law. The Affordable Care Act introduced two new taxes on high earners: the Net Investment Income Tax (or NIIT) and the additional Medicare tax. The NIIT a flat tax of 3.8% that high earners must pay on certain types of investment income, including interest, dividends, annuities, capital gains, royalties, rents, and pass-through income from S corporations and partnerships. This is an additional tax that is assessed on top of ordinary income taxes.
The additional Medicare tax is a flat tax of 0.9% that is assessed on earned income (e.g., wages and self-employment income) in excess of certain AGI thresholds. Both taxes kick in for individuals with AGI that exceeds $200,000 and married couples with AGI that exceeds $250,000.
If you will earn enough money in 2014 to be subject to these taxes, there are a few things you can do this year to help minimize their impact. One strategy is to shift income-producing investments into tax-deferred retirement plans like IRAs or 401(k)s. Another is to invest in tax-exempt municipal bonds instead of taxable bonds (interest from municipal bonds is exempt from the NIIT). Still another idea is to try to defer income into next year (as discussed above) in order to get your 2014 income below the AGI limit.
- Monitor your federal and state tax withholdings and estimated tax payments. Your goal should be to have enough tax withheld from your paycheck, or paid through estimated taxes, so that you do not come up short and have to pay underpayment penalties. If you will make more money this year than last year, you can take advantage of the 110 percent safe harbor: As long as you pay at least 110 percent of last year’s federal tax liability on a timely basis, you can pay any balance due on April 15th without interest or penalties.
Granted, taxes might not be at the top of the list of things you want to think about at this time of the year. However, spending some time now focusing on year-end tax planning could reap major financial returns for you come next April.