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End of year tax planning tips

End of year tax planning tips


Before you start thinking about holiday shopping, give some thought to year-end tax planning and preparation.

It’s not too late to take some efficient tax-savings measures for 2014, the Virginia Society of CPAs said. With proper tax planning, you can maximize your potential tax savings and minimize your tax liability.

Tax planning means looking at your estimated income, deductions and tax liability. Year-end tax planning lets you examine your current financial status and set goals to help you achieve your financial objectives.

To help you prepare, tax experts offer a few tips for individuals:

Check your earnings and withholdings

Look at your current earned wages or other income and how much has been withheld for income taxes or what quarterly estimated taxes have been paid.

Then try to make a reasonable effort of estimating the earned income and withholdings for the remainder of the year. Add to this income your projection of other income, such as interest dividends or capital gains, for the entire year.

“Take last year’s tax return and adjust the numbers for the income and expenses you anticipate this year,” said CPA Jim Shepherd, chairman of Richmond-based Verus Financial Partners. “Even though it’s not going to be exact, you can get a good idea of where you’ll be.”

At this point, you can see if you are likely to owe taxes for 2014 or get a refund.

You may then need to consider adjusting your withholdings. Toward year-end, if you are due a bonus, ask if your employer will defer it until January. This might give you more time in 2015 to do some more effective tax planning.

Life changes

Did you get married or divorced this year? Change jobs or retire?

A change in employment, for example, may bring about severance pay, sign-on bonuses, stock options, moving expenses and COBRA health benefits, among other changes that affect your taxes, the National Society of Accountants pointed out.

Itemized deductions

Will you itemize your deductions or take the standard deduction for 2014? How do you determine which to use?

The standard deduction is determined annually and is a “no questions asked” allowance as a reduction of your income, the Virginia Society of CPAs noted.

For 2014, the amounts for different filing statuses are:

  • single: $6,200
  • head of household: $9,100
  • married filing jointly: $12,400
  • married filing separately: $6,200

Deciding to itemize deductions depends on how much you spent on items such as the ones listed below, which are by no means an exhaustive list:

  • medical expenses exceeding 10 percent of your adjusted gross income;
  • state income, personal property and real estate taxes;
  • interest on home mortgages;
  • interest on debt to purchase or carry investments, limited to the amount of your investment income;
  • charitable contributions in cash and in kind; and
  • certain employee and investment expenses to the extent they exceed 2 percent of your adjusted gross income.

If the total amount spent is more than your standard deduction, it may be beneficial for you to claim the itemized deductions.

If it looks as if you won’t have enough of those to itemize in 2014, you may want to defer as many of those expenses as you can, pay them in 2015 and start the comparison again — in effect, “bunching” your deductions.

“The (tax) code has a lot of deductions and exemptions available to people,” Shepherd said.

Check your investments

If you already have taxable capital gains from, for instance, selling stock or real estate, see if you have some unrealized capital losses in other assets that you can sell before year-end to offset those gains and reduce your tax liability.

“You can deduct up to $3,000 in capital losses each year, and if there are more (losses), you can carry them forward,” Shepherd said.

If you’re thinking of selling stock, consider postponing the gain until January to avoid the tax in 2014.

But first, experts said, make the right decision from an economic or investment standpoint.

“Don’t let the ‘tax’ tail wag the ‘economic’ dog,” the Virginia Society of CPAs said. “Make sure the decision benefits your overall financial objectives.”

Retirement plans

One of the best tax-planning opportunities is to maximize your retirement contributions. Make elective deferrals to your 401(k) account in addition to what your employer contributes.

You can reduce your income by up to $17,500 — $23,000 if you are at least 50 — in some cases. Money you contribute to your 401(k) plan is excluded from your income, which helps lower your tax bill.

If you work and are not covered by a qualified retirement plan, you can make a deductible Individual Retirement Account contribution in 2015 before April 15, the original due date of the return.

Those contributions are deductible in 2014. You basically have 15 months to contribute to an IRA for the current tax year. For example, you can make 2014 contributions any time from Jan. 1, 2014, to April 15, 2015.

Education savings opportunities

Education savings plans are a good long-term savings vehicle to provide for your children’s or grandchildren’s college expenses.

Income earned in these accounts is not taxed as long as the funds withdrawn go toward qualified education expenses.

Generous giving

For 2014, you can give up to $14,000 to a person without incurring any federal gift-tax liability. If you’re married, you and your spouse can give up to $28,000 per recipient.

However, to qualify for the annual gift exclusion, you must give the funds directly to the individual or put them into a trust with certain requirements. You do not get an income-tax deduction for gifts to relatives.

“If we haven’t written our checks yet to the grandkids to use up the annual exclusion, we do that,” said Williams Mullen attorney Daniel J. Durst in Richmond.

And, Durst said, “Get your charitable gifts made before the end of the year if you plan on taking a charitable income-tax deduction.”

Health insurance

The federal Affordable Care Act now mandates that you carry health insurance or make a shared responsibility payment, unless you’re exempt, according to the National Society of Accountants.

For many, employer-provided health insurance, Medicare or Medicaid satisfies this mandate.

If you must make a responsibility payment with your 2014 return, you owe a twelfth of the annual payment for each month that you or your dependents are not covered or exempt.

For 2014, the total annual payment is generally the greater of:

  • 1 percent of your household income above the tax return threshold for your filing status (for example, your income above $10,150 if you are younger than 65 and file using single status, or your income above $22,700 if you file as married filing jointly with your spouse and you’re both 65 or older);
  • or a flat dollar amount of $95 per adult and $47.50 per child, to a maximum of $285.

The annual payment maxes out at the cost of the national average premium for a bronze-level health plan available through the Marketplace in 2014: $2,448 per individual, $12,240 for a family of five or more.

Spend your FSA money

A flexible spending account is a savings account offered by an employer that helps you put away tax-free money for qualified medical expenses.

The IRS has changed the rules so that employers can allow employees to carry over up to $500 in their account to the next year. Companies have the option to allow participants to roll over unused funds, but are not required to do so.

If your FSA is a “use it or lose it” one, you’ll want to make sure to use all of your funds by the end of the year. Spend down your FSA on qualified medical expenses to help maximize your tax savings.

“And you want to use your flexible spending account for dependent care,” said CPA Jennifer F. Flinchum, lead partner with Henrico-based Keiter’s tax services group.

When you start your 2015 tax planning, evaluate the amount you spent in your FSA during 2014 and adjust accordingly.

And for next year?

Start now keeping really good records, Flinchum said.

“Don’t miss deductions for sloppy record keeping,” she said.


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