It’s hard to believe that the end of 2014 is just over 2 months away. However, it is not too late to go over some last minute tax planning tips to help decrease your tax bill come April.
1. Increase your retirement savings.
Increasing your 401(k), 403(b), IRA or other retirement account contributions in an easy way to save for the future while also decreasing your tax liability. The 2014 maximum 401 (k) and 403 (b) elective deferral is $17,500 with an additional $5,500 catch-up contribution if you are over the age of 50. The 2014 maximum IRA contribution is $5,500 and $6,500 if you are 50 or older.
2. Offset capital gains with capital losses.
If you have some capital gains that are going to cause you to owe some money this year, it could be helpful to sit down with your investment advisor to see if there are some capital losses you could take before the end of the year to offset your gains. Keep in mind that the maximum rate for short term gains is 39.6% with the possibility of an additional 3.8% net investment income tax for higher-income households. I’m sure you can see the value of biting the bullet and selling some of your loser investments to offset a possible 43.4% short term capital gains tax.
3. Open an educational 529 plan for a family member.
If you already have a 529 plan set up, increasing your contributions before the end of the year could reduce your current year state tax. There is currently no federal tax deduction, but about two thirds of the states allow some form of a deduction or credit. For instance, Indiana allows for a tax credit of 20% of the first $5,000 of contributions. Meaning the maximum tax credit is $1,000. It is important to note that this is a tax credit which is better than a deduction. A tax credit is a dollar for dollar decrease in your tax liability. Unfortunately Kentucky does not offer any tax deduction or credit for 529 plan contributions.
4. Maximize your contributions to your health savings account.
Contributions to your health savings account creates an above the line tax deduction. This means that you get this deduction regardless of if you itemize your deductions or take the standard deduction. This is a great way to save for future healthcare expenses while also decreasing your current year tax bill. The 2014 maximum contribution to a single HSA account is $3,300 and $6,550 for a family account. There is an additional $1,000 catch up contribution if you are over 50.
5. Bunch deductible expenditures together.
If for whatever reason you anticipate an unusually high tax bill this year and suspect that it should be back to normal going forward, you could bunch some of your itemized deductions. For example, you could prepay your property taxes before the end of the current year, thus increasing your current year itemized deductions. You could do the same with your charitable contributions. However, keep in mind that charitable contributions are limited to 50% of your adjusted gross income. When you are contributing two years worth of contributions in one year, you could approach that limit.