If you want to lower your overall taxes for this year, now is the time to act. The opportunities to cut taxes on your overall bill are reduced dramatically after December 31. Many taxpayers forget about these opportunities or act too late to take advantage. In addition, Congress has yet to enact any intense tax changes this year, unlike the changes made in 2013. In fact, legislators have not moved on dozens of taxpayer friendly provisions that expire January 1.
Provisions that are Ending
One of the most popular provisions on the chopping block is a law that allows owners of individual retirement accounts who are 70½ and older to give up to $100,000 of their IRA assets directly to charity each year. In addition, a federal write-off for state sales taxes instead of state income taxes and a deduction of up to $4,000 a year for qualified expenses for college or other post-high school education may also end this year.
Hopefully, lawmakers will extend these provisions during this year’s lame duck session, and if so, they will likely be retroactive to the beginning of the year. However, IRS Commissioner John Koskinen has warned Congress publicly that if they do not enact these extensions before the end of the year it could cause delays in tax refunds this spring.
Key Areas to Consider Reviewing
There are plenty of other issues facing taxpayers, especially given the complexity of the current code, numerous phase-outs, phase-ins, surtaxes and hidden marginal rates. Many taxpayers should consider running their 2014 tax numbers before the end of the year to see how they could benefit from specific strategies. This is particularly important for taxpayers who have had a significant change in their income or a major life event like a birth, death, marriage, divorce, retirement, the sale of a home, or a job change.
Here are some key areas to consider before the end of the year:
Adjusted Gross Income
Phase-outs and surtaxes are attached to different adjusted gross income (AGI) thresholds. One good way to avoid losing benefits or incurred surtaxes is to keep your AGI as low as possible. You can do this by spreading income over more than one year, offsetting capital gains with capital losses, making pretax contributions to a 401(k), IRA or other retirement plan, or by contributing to a health savings account.
Investment Gains and Losses
Be sure to include mutual funds held in taxable accounts because some have announced capital gains distributions before the end of the year. Taxpayers can use realized capital losses to offset realized capital gains, plus $3,000 of ordinary income, every year. Unused losses carry forward for use in the future.
All contributions should be made by the end of the year. However, a more tax-efficient move than writing a check is to give the same value in appreciated assets like shares of stock. Donors often get a deduction for the full market value of the asset while avoiding capital gains tax. For a large gift, consider using a donor-advised fund.
Unreimbursed medical costs are only deductible over ten percent of AGI, or 7.5% for people ages 65 and older. However, some assisted living costs and nursing home costs are typically deductible, in addition to tuition for special schools for students needing special therapies. If you meet the threshold, there are a wide range of other healthcare costs are deductible, as well.
This is the first year to implement a tax on people who do not have health insurance that meets the Affordable Care Act. To avoid the tax, people need to have been covered by an approved healthcare policy for nine months in 2014. If you were not, the penalty is either a flat amount or one percent of income, whichever is greater.