Don't wait until the last minute to give yourself the gift of keeping more money in your pocket or increasing your refund. Even this late in the year, the ideas in this blog can help you make the most of your tax situation. Most of these are easy to do with a little shopping, a bit of giving, and some planning.
Consider Bunching Itemized Tax Deductions in the Current Year
Schedule A is a happy place. On Schedule A you can reduce your federal income tax if you have enough itemized deductions. If you do not have enough itemized deductions then you will simply get the standard deduction. Many of us don't have enough deductions from year to year to take advantage of itemized deductions, however, if you prepay some of your expenses before the end of the year and purchase extra necessary items now, you may be able to itemize deductions this year. Let's look at some of the items you can prepay or group this year as well as some less common items you can deduct.
Thinking about quitting smoking and losing weight this holiday season? Great! Not only will you contribute to your health, but if you quit smoking with prescribed products, or join a weight loss program after a treatment for specific disease, you can add these elective expenses up. Stock up on contact lenses, medical supplies such as special compression hose and parts for crutches or walkers, even things like hearing aid batteries before the end of the year. This way, you will be more likely to have these expenses exceed 10% of your adjust gross income (AGI) so you can deduct them. Don't forget to purchase your long-term insurance now and pay your January premium payments before the end of this year.
Pay for your 2015 licenses now. Grouping unreimbursed employee expenses, such as safety equipment, licenses and regulatory fees, and union dues, can help you "increase" your 2014 deduction. Document the gifts for your business associates, employees or other business contacts during the holiday season. They may be a deductible business expense.
This time of year is often associated with giving; and charitable contributions are a great last-minute tax deduction. If you make a donation via credit card in December, then it is deductible this year. Claim the deduction the year you make it, not when you pay the bill in January. If you are donating cash it is best to write a check to keep for your records, if you donate an item then you can donate the current fair market value. Remember you must have a receipt from the charity with the date, amount, and whether you received anything in exchange (like a calendar or tote bag with a cute puppy on it). High income taxpayers may have their itemized deductions limited. If you are unsure of your deductions, check with your Tax Pro.
Out With the Old
Do you have a loser of a stock sitting in your portfolio? You can help offset any capital gains from this year with losses. Mutual fund distributions are taxable and count toward your capital gains. You can offset your gains with your losses each year and if you have any loss left you can claim up to $3,000 a year, if you have more than $3,000 you can carry forward the unused loss and apply it to any gain in the next year and claim $3,000 as a loss. Do this each year until the loss is gone.
Defer Income to 2015
Was this a great year for you? If you think you could be in a lower tax bracket next year, how about moving some income to next year? If bonuses, self-employment income, or capital gains (see above), could be put off until January then you might be able to stay in a lower tax bracket. Be sure that you review both 2014 and potential 2015 income to ensure you don't end up in a higher bracket in 2015.
Contribute to Your Retirement
Did you get a bonus in 2014? Reduce your taxes on it by making an increased contribution to your 401(k). Don't contribute more than the max though! The maximum you can contribute in 2014 is $17,500 ($23,000 if you are over age 50).
By the way, even if you do not have the money -- yet, open your IRA by December 31. You can fund it anytime on or before April 15, 2015 and the contribution may be deductible on your 2014 taxes. Depending on the type of IRA you have, contributions can reduce your taxable income now and may be taxed at a lower rate later. You can put a maximum of $5,500 in an IRA for tax year 2014 ($6,500 if you are age 50 or older).
Speaking of retirement, if you are over 70½ be sure to take your minimum required distribution from your IRA before the end of the year. If not, 50 percent tax penalty on what you didn't take out but should have will be added to the regular tax. If you are you reading this after January 1, 2015 and you turned 70 ½ during 2014, you can take your distribution now. Keep in mind that you will have two distributions in 2015, your delayed first year distribution and your required 2015 distribution.
Tax matters are often complicated, which is one of the reasons I recommend you consult a professional tax advisor for more information. The cost of professional tax preparation services is deductible and in many cases you could save more than you spend!
So give yourself one final gift this year and consider your taxes as you do what you normally do during the end of the year and the holiday season. A bit more attention to the tax rules and possibly tweaking what you do, might give you a bigger refund at tax time.