As we head into the holiday season, tax planning may not sound like cause for celebration. But by attending to a few year-end housekeeping essentials, you can make an important positive impact on your financial future.
As with any kind of financial planning, knowing that you’ve prepared can help create confidence and peace of mind. And that just might make your holidays a little happier.
Consider Tax-Loss Selling.
Selling losing investments toward the end of the year can help to lower your tax liabilities. Selling allows you to realize the capital loss, which is deductible against capital gains and ordinary income.
It’s most effective to apply your deduction to ordinary income – which is taxed at a higher rate than long-term capital gains, and to short-term capital gains, which are taxed as if they were ordinary income. This year, you can deduct up to $3,000 in net capital losses against ordinary income.
Keep in mind that if your net capital loss exceeds $3,000, you can carry forward, or “bank,” the excess to offset gains in the future. Be sure to ask your qualified tax professional to show you where your tax-loss carryforwards are displayed on your tax return. Also be sure to discuss the 31-day rule you must follow before buying back in to avoid disallowing the tax loss.
Fund Your Retirement Accounts.
Maximizing contributions to your qualified retirement accounts is another excellent way to ease your tax burden. You’ll have to pay Uncle Sam when you eventually take distributions of your retirement savings. But maxing out your plans now allows you reduce your immediate taxable income, and to invest and earn tax-deferred gains from money that otherwise would have gone to the IRS.
Bear in mind that different kinds of retirement accounts have different contribution rules. The typical 401(k) or 403(b) plan participant can contribute up to $17,500 to their account this year. Participants 50 and older can contribute up to $23,000. IRA accountholders under age 50 are allowed to contribute as much as $5,500, while those who are older can contribute $6,500.
Remember, 401(k) contributions must be made by the end of the calendar year to be counted toward your 2014 deduction. IRA contributions, on the other hand, can be made up until the April 15 tax-filing deadline.
If you are a business owner, consider establishing a qualified retirement plan before calendar yearend. Depending upon your situation, you may be able to reduce your taxable income by many tens of thousands or even hundreds of thousands of dollars by contributing to a pension or profit-sharing plan.
Do Well by Doing Good.
Charitable contributions are another great tool for lowering your tax bill. Two pieces of advice here: First, make sure you donate to a qualified charitable organization. To ensure that an organization meets this test, ask to see its qualifying letter from the IRS. As an alternative, you can find a list of qualified organizations here. And remember that donations to churches, synagogues, mosques and educational organizations are tax-deductible even if the organization doesn’t appear on the IRS list.
Give wisely. Donating cash may not be the most tax efficient manner to complete your gift. With increased asset values during the past four years, consider the additional tax benefits of gifting highly appreciated property, like a stock.
Also, allow yourself the time to thoughtfully choose a recipient. Your giving provides more than the opportunity to earn a tax break, so make sure you’re supporting the values that are most important to you. And remember that philanthropy is an opportunity to educate your family members and reinforce your shared family values.
Take Advantage of Tax Rules.
Gifting can significantly reduce the size of your taxable estate.
For 2014, individuals may transfer up to $14,000 per recipient without having to pay any federal gift tax; married couples can gift as much as $28,000 per recipient. Those amounts are in addition to the individual lifetime exclusion of $5.34 million; $10.68 million for married couples.
If you’re helping kids or grandkids to fund college, your payments of qualified expenses directly to the educational institution do not count against your $14,000 tax-free gift to each recipient this year. There is a similar special provision for direct payment of qualified healthcare expenses too. Be sure to check with your qualified tax professional about the specific rules and limitations with these types of payments.
There is even a special provision in the 2014 tax code that can help you build savings for future higher education expenses more quickly with a 529 college savings plan. The provision allows you to claim five years’ worth of annual gift-tax exclusions in one year. That means you can contribute as much as $70,000 to each beneficiary’s plan ($140,000 for married couples), free of gift taxes and in addition to your lifetime exclusion amounts. Not only can you give your loved ones a leg up on paying for college, but you can give yourself a leg up with your taxes.
Be sure to schedule a year-end meeting with your qualified tax professional and financial advisor to discuss these and other tax-saving strategies. If you would like to work with a financial advisor who builds and supports interdisciplinary advisory teams and cultivates collaboration with the other members of your advisory team, we may be able to help. That’s just part of what we do.