Year-end Tax Planning for Individuals
This is the second in a series of three articles dealing with year-end tax planning that I began two weeks ago. Today, we'll address planning specifically for individuals.
Bear in mind, not all actions will apply to your situation, but you (or a family member) will likely benefit from many of them. Here are some ideas to consider:
- Take losses on stock. You can even do this while substantially preserving your investment position by selling the stock, then buying back the same securities. You must wait at least 31 days to repurchase, otherwise the loss isn't deductible.
- Postpone income until 2015 and accelerate deductions into 2014. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest.
Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit. - If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2014.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary.
You can back out of the transaction by recharacterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA. - It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don't pay your credit card bill until next year.
- If you expect to owe state income taxes when you file your return next year, consider asking your employer to increase withholding of such taxes (or make estimated tax payments) before year-end to pull the deduction into 2014, if doing so won't create an alternative minimum tax (AMT) problem.
- If you are facing a penalty for underpayment of estimated tax, ask you employer to increase your withholding. If doing so isn't possible or doesn't adequately address the problem, consider taking an eligible rollover distribution from a qualified retirement plan. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014.
Then, within 60 days, roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax. - Estimate the effect of any year-end planning moves on the AMT for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for property taxes, state income taxes, miscellaneous itemized deductions, and personal exemption deductions.
- You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
- Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year.
- If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
A careful review of your tax situation is needed to determine which of the above strategies will benefit you. Next time, we'll end our series with a look at business planning strategies.
