YearEnd Tax Tips for 2014

Post on: 5 Апрель, 2015 No Comment

Key Points

If you find yourself stressed come tax time, read on. First, take heart that you can act before the end of the year to help minimize the pain of April 15. Then, consider the tax tips below affecting key areas of your financial life—from your portfolio to your retirement and more.

Whether you do your own taxes or rely on a tax professional, these tried-and-true strategies may help you keep more of your hard-earned income and boost your after-tax returns. After all, it’s what you keep that counts.

Get started: Six simple steps

Using last year’s tax return as a starting point, begin this year’s process by updating some of the key inputs: your salary and other income, deductions and the dependents you’ll claim. Input these numbers into tax preparation software to get an idea of where you stand, or ask your accountant for an estimate. If the initial estimate seems high, don’t panic. Instead, get going on your taxes by taking these six simple steps.

Double-check your withholding. You want to pay the IRS its due but not a penny more. So make sure you’re not having too much (or too little) taken out of each paycheck. The same holds if you make quarterly estimated tax payments.

Consolidate debt. Consider replacing credit card debt, which generally has a higher interest rate, with a lower-rate, tax-deductible home equity loan or line of credit (HELOC).

Account for refinancings. If you lowered your mortgage interest rate in the past year, you may now have a lower-interest deduction. Also, if you used any of the proceeds for something other than physical improvements to your home, that amount may be subject to the alternative minimum tax (AMT). Remember that points paid in prior refinancings that you haven’t already deducted can be deducted the year you refinance again.

Prepay quarterly estimated state tax payments. Consider paying your fourth-quarter 2014 estimated state income taxes and any outstanding balance due by December 31. Your payments will be tax deductible for the 2014 tax year if you’re not subject to the AMT.

Prepay property taxes. Many counties bill taxpayers twice, in November and February. If you pay your February installment by December 31, you can take it as a deduction on your 2014 return. Again, watch out for the AMT, which disallows these deductions.

Avoid the AMT if you can. More taxpayers are facing the AMT, particularly dual-income homeowners who have children and live in high-tax states. If you’re one of these taxpayers, try to defer payment of state and local taxes and accelerate income to the point where you’re no longer subject to the AMT. Also, multiyear planning is a must, so talk to a tax professional.

Portfolio planning: Three tax-smart rebalancing strategies

Year-end is a great time to give your portfolio a checkup. Consider these tax-smart strategies to help boost your after-tax returns.

Harvest losses. No one likes a losing investment but at tax time, they can be blessings in disguise. You can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income ($1,500 for married couples filing separately). Look in your taxable accounts for investments with relatively large losses where you don’t expect a comeback. Remember, any losses you can’t use to offset gains this year can be carried over into future tax years. One word of caution: Watch out for the wash sale rule, which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days.

Note: High earners stand to benefit the most from harvesting losses, given the increased capital gains tax rates for taxpayers in the top bracket and the 3.8% surtax on net investment income over the modified adjusted gross income (MAGI) threshold of $200,000 for single filers and $250,000 for married filers. When the surtax is included, long-term capital gains for most sales are taxed at a top rate of 23.8% and short-term gains are taxed at a top rate of 43.4%.

Make the most of tax-advantaged accounts. You may be able to bring your asset allocation back in line without incurring taxes by rebalancing tax-deferred retirement accounts like IRAs or 401(k)s.

Consider cash flow. If you’re living off your portfolio in retirement, remember to set aside any cash you might need for the next 12 months as you rebalance. For example, if your portfolio is overweighted to stocks, you could take out what you need to live on from that overweight portion and then reinvest the rest in bonds until you’re back on target.

Cost basis reporting

Financial institutions are required to report gain/loss details to you and the IRS for certain investments you sell. These include:

Equities acquired on or after January 1, 2011.
Mutual funds, ETFs and dividend reinvestment plans acquired on or after January 1, 2012.
Other specified securities, including most fixed income and options acquired on or after January 1, 2014.

We recommend saving your purchase and sale documentation, including records of any automatic reinvestments, to make sure it matches the information financial institutions will report to the IRS. You should also make sure your financial provider is using the accounting method of your choice. Even though FIFO (first in, first out) is the IRS default method for both individual securities and mutual funds, most institutions (including Schwab) will report individual securities using the FIFO default method and report mutual funds using the average cost single-category method.

Retirement: Four tax-savvy planning ideas

Take full advantage of your employee retirement plan, at least to the point of any employer match. And if you’re 50 or older, make a catch-up contribution (see table below). If you expect to be in a higher tax bracket down the road (for example, if you’re a younger worker who has yet to reach peak earning years) and your employer offers the Roth 401(k), consider it. You won’t get any up-front tax benefits, but after you retire, qualified distributions will be tax-free.