As we approach year end, it's again time to focus on last-minute moves you can make to
save taxes - both on your 2014 return and in future years. Here are a few ideas.
Maximize the benefit of the standard deduction. For 2014, the
standard deduction is $12,400 for married taxpayers filing joint returns. For single
taxpayers, the amount is $6,200. Currently, it looks like these amounts will be about
the same for 2015. If your total itemized deductions each year are normally close to
these amounts, you may be able to leverage the benefit of your deductions by bunching
deductions in every other year. This allows you to time your itemized deductions so
they are high in one year and low in the next. For instance, you might consider
moving charitable donations you normally would make in early 2015 to the end of 2014.
If you're temporarily short on cash, charge the contribution to a credit card - it is
deductible in the year charged, not when payment is made on the card. You can also
accelerate payments of your real estate taxes or state income taxes otherwise due in
early 2015. But, watch out for the alternative minimum tax (AMT), as these taxes are
not deductible for AMT purposes.
Consider deferring income. It may be beneficial to defer some taxable
income from this year into next year, especially if you expect to be in a lower tax
bracket in 2015 or affected by unfavorable phaseout rules that reduce or eliminate
various tax breaks (child tax credit, education tax credits, and so forth) in 2014.
By deferring income every other year, you may be able to take more advantage of these
breaks every other year. For example, if you're in business for yourself and a
cash-method taxpayer, you can postpone taxable income by waiting until late in the
year to send out some client invoices. That way, you won't receive payment for them
until early 2015. You can also postpone taxable income by accelerating some
deductible business expenditures into this year. Both moves will defer taxable income
from this year until next year.
Secure a deduction for nearly worthless securities. If you own any
securities that are all but worthless with little hope of recovery, you might
consider selling them before the end of the year so you can capitalize on the loss
this year. You can deduct a loss on worthless securities only if you can prove the
investment is completely worthless. Thus, a deduction is not available, as long as
you own the security and it has any value at all. Total worthlessness can be very
difficult to establish with any certainty. To avoid the issue, it may be easier just
to sell the security if it has any marketable value. As long as the sale is not to a
family member, this allows you to claim a loss for the difference between your tax
basis and the proceeds (subject to the normal rules for capital losses and the wash
sale rules restricting the recognition of loss if the security is repurchased within
30 days before or after the sale).
Invest in tax-free securities. The most obvious source of tax-free
income is tax-exempt securities, either owned outright or through a mutual fund.
Whether these provide a better return than the after-tax return on taxable
investments depends on your tax bracket and the market interest rates for tax-exempt
investments. With the additional layer of net investment income taxes on higher
income taxpayers, this year might be a good time to compare the return on taxable and
tax-exempt investments. In some cases, it may be as simple as transferring assets
from a taxable to a tax-exempt fund.
Again, these are just a few suggestions to get you thinking. Please call us if you'd
like to know more about them or want to discuss other ideas.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014