Strategic End-of-Year Tax Planning for Financial Optimization

Today on the show, I've got some last-minute tax planning ideas for you. These are all ideas and tactics that you can use in the last two weeks of 2014 to lower your income tax bill.

I hope you don't defer your tax planning to the end of December. The end of the year is far too late to start talking about the really good stuff. Good tax planning should begin before January 1.

But, these types of ideas can still be useful for you. It's possible that you've simply been too busy to do effective planning.

It's also possible you had an unexpected windfall and you need to wipe out some tax liability.

I'm here to help! :)

Let's start with the easy ones and move to the harder ones:

• Last-minute retirement account contributions.
  • 401(k)s and 403(b)s are tough becausec you have to have made your contributions as you go. Consider talking to HR about diverting a bonus check into the account if you can.
  • IRAs are simple. You can contribute any time until you file your return. You can contribute up to $5,500 in 2014. Don't forget about the $1,000 catch up if you're older than 50.
  • Almost everyone I've ever worked with is confused by the contribution limits. Read them for Roth IRAs and Traditional IRAs.
  • Little tricks for IRAs: You can make a separate payment for custodian fees, brokerage commissions, etc. in excess of the contribution limit. That will allow you to get the maximum value from the account.
  • Consider establishing a an HR10/Keogh Plan or a SEP IRA.
    • Keogh plans were very popular for self-employed people prior to 2001. There was a tax law change in 2001 and now they're largely replaced by SEP IRAs.
    • They have the same contribution limits but the SEP paperwork is much simpler.
    • A Keogh plan has to be established by the end of the year but it can be funded prior to filing your return.
    • A SEP IRA can be established after the end of the year and funded after the end of the year.
    • The maximum contribution is the lesser of 20 percent of earned income, less your deduction for half your self-employed payroll tax, before the deduction, or $52,000. (This winds up being 25% of net earned income after the deduction.)
    • Remember that you can have one of these plans in addition to a 401(k) and an IRA.
  • Don't forget about the HSA. If you're covered by a HDHP, you can make your HSA contributions any time up till you file your return. Your contribution limits are $3,300 for an individual and $6,550 for a family. Remember also that there's a $1,000 catch-up contribution for 55+. This won't save you on your employment taxes but it will save you on your income taxes.
  • One final little trick on IRAs. Look to see if you'll be eligible for a saver's credit. If you're at a low income level, this might help you...even if you can't afford to save for retirement. If you need to and you want to be aggressive, you can contribute to your Roth in December, take the savers credit on your return, and then take the distribution in January. (You'll owe tax on any gain but not on the contributions/basis.)
• Consider deferring your income in other ways.
  • You can enter into a binding agreement until January to defer the grant of a bonus that you would otherwise receive in December. You need to enter into the agreement before the bonus is "constructively received."
  • The easy way to defer your income is if you are in business for yourself is to simply delay billing your clients until late December. You won't receive payment until the following year. Thus, no taxes in this year.
  • Remember that this only works if you are a cash basis tax payer. If you are an accrual basis taxpayer in your business, you have to report the income when it is earned, not when it is received.
  • If you have income from the sale of property, consider using an installment sale to defer income to a different tax year.
  • Consider accelerating your expenses to lower your net income.
  • In business, you can think through any end-of-year transactions you need to pay: accounts payable, conference fees, insurance premiums, marketing and advertising expenses, etc.
  • Remember that you have to follow the 12-month rule.
  • Consider buying equipment. In general, equipment will primarily be depreciated rather than expensed. But remember that you can make a Section 179 elect to expense up to $500,000 and then take your depreciation after that.
  • Consider bunching certain expenses such as medical expenses. If you've had a lot of medical expenses this year, consider going ahead and getting your dental expenses and eye expenses taken care of and pay forward the annual premium on your LTC insurance. That may result in enough deductions to take advantage of the medical expense deduction.
  • Consider accelerating your tax payments: real estate taxes, personal property taxes, and state and local income taxes. Pay them now to take the deduction. (Be careful of AMT.)
  • Consider making your charitable contributions and make sure to bunch them in years that you can fully use them.
  • If you're making charitable contributions, be smart about how you do it, especially with regard to your taxes. Don't only think in terms of cash.
    • If you have appreciated property that you've held over 12 months, contribute it to the charity and take a deduction for the FMV. (Avoids the tax on the gain.)
    • If you have loss property, sell it, take the tax loss and give the cash.
  • You can take deductions for items paid by check in the current year even if you mail the check on New Year's Eve, as long as there is no reason why the check can't be cashed in January.
  • Credit card charges can be taken this year even if you don't pay the bill until next year.
• Think through the tax ramifications of your relationships.
  • If you're planning an end of the year or New Year's day wedding, calculate your taxes and see when you should actually schedule the marriage. Doesn't have to be the same day necessarily as the wedding itself.
  • In general, marriage will only cut your taxes if one spouse works or earns almost all the income. Marriage will actually boost your taxes if both spouses work and earn good income.
  • Dependents: Most people think purely about kids. There might be a planning scenario involving them. For example, if you're having a planned C-section and the safe zone covers new years, have it on 12/31. Or, if you're adopting, try to get it finalized before the end of the year.
  • But, the major benefit for some of you might be if you're caring for parents. There are a bunch of detailed rules. The one I want you to focus on is if you're providing more than half of a dependent's support. Doesn't mean income...it means support. Might be worth it to bunch some of your support here at the end of the year so that you can claim them as a dependent.
• Make sure you harvest your tax losses but also that you harvest some gains. Ratcheting up your basis in your investment portfolio over time can really save money in the long run.