Written by: Bentley University Professor Mark S. Carley, CPA
The leaves have fallen and the Holidays are upon us. As you turn your attention to family gatherings and good cheer, it is also the final chance to review your tax situation for the year. A check-in with your tax advisor to prepare a year-end tax projection is a good place to start. Some will learn a refund is soon coming their way, while others may find they owe more than they thought.
Should you find out money is owed, consider some of the following ideas as a way to lower the tax burden:
1. Make a gift to your favorite charity. Many use cash for this purpose, but you may want to consider making the gift with appreciated securities. You generally receive a deduction equal to the fair market value of the appreciated securities. Keep in mind, it is also a convenient way to rebalance your portfolio and reduce your exposure to an appreciated investment without paying any capital gains tax. Your advisor can help identify some of the “winners” from your investment portfolio for this purpose.
2. Advance the payment of your 4th quarter state estimated tax payment, typically due in January of next year, to the current tax year. Also consider “bunching” other deductions, such as investment expenses, tax prep fees, legal fees, etc. into this year. Your tax advisor can review your alternative minimum tax (AMT) situation to make certain you will receive the tax benefit this year.
3. Maximize contributions to your 401(k)/403(b) account before the last paycheck of the year is cut. The limit for 2014 is $17,500 plus an additional $5,500 if you’re age 50 or older. For someone subject to a 30% tax rate, an additional contribution of $1,000 will only cost you $700 since your tax burden just went down by $300. More importantly, you can now begin investing the $1,000 in an account that can grow tax-deferred for many years.
4. Harvest some tax losses. Your tax advisor can help tally the capital gains and losses you’ve realized to date from all your assets – investment accounts, business investments, real estate dealings, etc. No need to consider your retirement accounts (IRAs, 401(k)s, etc.) because they are not currently subject to tax. Harvesting losses is nothing more than selling investments (i.e. a stock, a mutual fund, an ETF, etc.) that are trading at a price below what you originally paid for them. These losses can then be used to offset any capital gains you realized so far this year. You can replace the investments you sold at a loss with other “similar” replacement investments within the same asset class. This is sometimes referred to as a tax swap.
A few other final reminders:
- Don’t forget to make annual minimum distributions from your tax-deferred retirement accounts. This applies to those age 70½ and older. A 50% tax penalty awaits you otherwise.
- Consider converting your traditional IRA account into a Roth IRA. A good time to do this is in a tax year when you expect your income and tax bracket will be low. Thus, the tax cost of the conversion may be less. You will pay tax on the conversion today in exchange for no additional income tax in the future – for you or beneficiaries.
- Make annual exclusion gifts (currently $14,000) to children, grandchildren or others. You get no income tax benefit but rather it’s a tax-free gift for estate purposes. And remember, it is a “Use it or Lose it” exclusion - this year’s exclusion can’t be carried over to the next year.
Yes, the days are getting shorter and it won’t be long before we ring in the 2015 New Year. But please know, there is still some time left to take some steps to impact your final tax liability for this year. Be sure to coordinate this effort with your tax advisor!
Originally published on November 5, 2014.