Authors: Stefans Law Group: Donna Stefans, Summit Advisors: Marilyn Stefans, CFP®
Summertime: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.
1.Preserve deductions. You’ve heard it before: Recordkeeping is essential. Examples of tax breaks that may be disallowed if you cannot provide proof include charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses. If you neglected to start tracking these expenses at the beginning of the year, get going now.
2.Bump up pre-tax retirement plan contributions. Elective contributions – the ones you ask your employer to withhold from your paycheck – reduce current-year taxable income. Compare the amount you’re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year. The maximum 401(k) contribution for 2014 is $17,500. If you’re 50 or older this year, add an additional $5,500.
3.Reset basis with capital loss carry forwards. Would you benefit from selling an appreciated stock and using your loss carry forward to shelter the income? Planning point: Reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.
4.Hold off on retirement plan withdrawals. In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible. For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts.
5.Plan for required minimum distributions. What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70½? Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount. Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution.
6.Gifting offers similar benefits. You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.) For 2014, you can give $14,000 to anyone without incurring gift tax.
7.Track passive activity losses. Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities. The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.
8.Check dependent status. Keep your college student qualified as your dependent by monitoring the “support” test. The rule: Generally, your child cannot provide over one-half of his or her own support during the year. Remember, too, that other relatives may qualify as your dependents, including parents in nursing homes.
9.Update payments. Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business. Overpaying your 2014 tax reduces your available cash flow, but underpaying can lead to penalties and interest.
10.Open an education savings account. There’s no federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college expenses in a taxable account, you could realize tax savings by opening a 529 plan instead. Earnings on plan assets grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.
11.Shift income. Broaden your tax-planning focus to include family members. For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings.
12.Review health insurance subsidies. Review your eligibility for the advance premium tax credit, a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange. If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit.