- Accelerate Deductions and Defer Income. One of the key elements of tax planning is deferring tax. Generally this means accelerating deductions into the current year and deferring income into next year with the many items and expenses you are able to control. Consider deferring bonuses consulting income or self-employment income. You may be able to accelerate state and local income taxes interest payments and real estate taxes on the deduction side.
- Combine Itemized Deductions. There are many expenses that can be deducted if they exceed a certain percentage of your adjusted gross income. Grouping itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling any costly non-medical procedures in a single year to exceed the 10% AGI floor for medical expenses. (7.5% for taxpayers ages 65 and older). This may mean that certain optional procedures be postponed until next year when you’ll have more medical expenses. In order to exceed the 2% AGI floor for miscellaneous expenses bunch professional fees like legal advice and tax planning as well as unreimbursed business expenses such as travel and vehicle costs.
- Make Up a Tax Shortfall with Increased Withholding. Check your withholding and estimated tax payments now while you have time to adjust. Try to make up any shortfall through increased withholding on your salary or bonuses if you are in danger of an underpayment penalty. Larger estimated tax payments can still leave you exposed to penalties for previous quarters while withholding can be paid throughout the year.
- Leverage Retirement Account Tax Savings. You can still increase contributions to a retirement account. Contributions reduce taxable income at the time you make them and you don’t pay taxes until you take the money out at retirement. Limits for 2014 are $17500 for a 401(k) and $5500 for an IRA (not including catch-up contributions for those 50 years of age and older).
- Reconsider Roth Rollover. Converting a traditional IRA into a Roth IRA has become popular recently. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future if the withdrawals are made properly.
- Leverage State and Local Sales Tax Deduction. If you itemize deductions you can deduct state and local sales tax instead of state income taxes. This is valuable if you live in a state without an income tax but can also help give you a bigger deduction in different states if you made big purchases subject to sales tax. If you have paid enough sales tax that you will make the election for 2014 consider making any planned large purchases before the end of the year. If you wait to purchase in 2015 and won’t be electing to deduct sales tax that year you won’t get any tax benefit.
- Don’t Squander Gift Tax Exclusion. In 2014 you can give up to $14000 to as many people as you want as a free gift or estate tax. Every year you will get a new annual gift tax exclusion. If you combine gifts with a spouse you can give up to $28000 per beneficiary per year.
- Understand the New Home Office Deduction Safe Harbor. If you use your home as your principal place of business use it to meet clients and customers or use your office as a separate structure not attached to your home you can deduct some of the cost of your home. The amount of deduction has been controversial recently but the IRS has a new safe harbor this year that allows you to deduct up to $5 per square foot of home office space up to $1500 per year.
- Maximize “Above-the-Line” Deductions. Above-the-line deductions can be deducted before you calculate your AGI. They can be deducted in full and make it less likely that your other tax benefits will be limited. Common above-the-line deductions include traditional IRA and health savings account (HSA) contributions moving expenses self-employed health insurance costs and alimony payments.
- Perform Overall Financial Checkup. End of the year is a good time to assess your current financial situation and plan for the future. Consider cash flow health care retirement investment and estate planning. Check wills powers of attorney and health care proxies for changes that may have occurred during the year and use the open enrollment period to reconsider employer-sponsored programs that could reduce next year’s taxable income. HSAs and flexible spending accounts for dependent care or medical expenses allow you to use pre-tax dollars.
If you need help determining what deductions you may be eligible for click here and let Lindemeyer CPA help you effectively manage your taxes before the end of the year.
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