Year-End Tax Planning

Tax planning should be a year-long process, but many people wait until the end of the year for some last minute planning. Here are some things you should consider.

  • All planning starts with a projection. Prepare one now to see where you stand for 2014 and take a look at 2015. This will indicate whether there is a need for planning
  • If you will be subject to the Alternative Minimum Tax, try to take some steps to either get out of it or take advantage of it. If in it, don’t pay any more state or real estate taxes which will not give you a benefit. Try to pay these taxes at the beginning of January if possible. If you cannot avoid the AMT, consider accelerating income that will be taxed at the lower AMT bracket such as cashing in old U.S. Savings Bonds, taking a distribution from a tax deferred account, rolling over an IRA into a Roth IRA or accelerating the receipt of income you would normally get in January
  • If you are eligible for traditional or Roth IRA contributions, consider making the contribution sooner rather than later to start the tax-deferred or tax-free income stream
  • If you have a business or receive income subject to self-employment tax, consider opening a 401k or Keogh account on or before December 31, 2014, or a SEP (which can be opened as late as the due date including extensions for your 2014 tax return). Contributions to all three plans do not have to be made until sometime in 2014 (check with tax advisor for the dates)
  • Accelerate as many deductions as possible to get the benefit this year rather than next year.
  • For charity giving, consider donating appreciated stock to either the charity or a donor-advised fund (DAV). You will get a deduction for the full value of the stock and not have to recognize the income. By using the DAV you can get your deduction this year and have the funds distributed to your charity in the next or later years
  • You can make a gift of appreciated stock to people you are supporting that are in a “0” tax bracket for capital gains, and have them sell the stock immediately, thereby, avoiding any tax. Note that you cannot do this with people subject to the Kiddie tax
  • If you own stock with losses, you can sell them to realize the loss. If you buy them back within 30 days (before or after the sale), you will have a “wash sale” and cannot deduct the loss. A suggestion is to sell them and then immediately buy an ETF that is comparable to the stocks you sell maintaining a similar market risk. After the 30-day period, you can reverse the transactions. An example is to sell individual healthcare stocks, and buy a healthcare ETF
  • If you have realized short-term gains, try to sell stocks with losses to shelter them. The best is to sell stock with long term losses. This will net out with the gains and those losses won’t offset long term gains in a later year
  • If you own mutual funds that will declare year-end capital gain dividends without making an offsetting distribution, consider selling them now!
  • If you want to pass some wealth to others that will be subject someday to estate taxes if retained by you, tax-free gifts of $14,000 per person can be made up until December 31. The $14,000 is doubled if you have a consenting spouse. There is no income tax benefit to this, but it will remove this money and any future earnings and appreciation from your eventual estate
  • If you are planning to pay for a child’s or grandchild’s college education, consider opening and funding a Section 529 plan which income would be tax free if ultimately used for post-secondary education expenses
  • If you were required to make estimated tax payments and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax. If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days designating it as a tax-free rollover
  • Owners of businesses with more than $1 million profits should consider a Captive Insurance Company deduction under IRC§ 831(b)

The above are suggestions you can consider. Before you do anything, meet with your tax advisor to make sure the planning is effective for your situation.

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