Income tax is one of the single largest expenditures that individuals and households pay annually. As we approach the end of 2014, it is time to assess your tax burden and consider end of year steps that can be taken to minimize your tax payment.
Your 2014 income tax payment will be based on your taxable income for the calendar year or deferring income until 2015. Here are a few tips to assist in your year-end tax planning. Minimize your income and your tax responsibility by either maximizing deductions for 2014.
Ways to Maximize Your Deductions
Maximize the tax deductions that you are able to take during the current calendar year to minimize your taxable income. Many people have tax-deductible expenses such as medical bills, property tax or charitable contributions. Making payments on these tax-deductible expenses in the current year instead of delaying those payments until 2015 will increase the total amount of your deductions and thereby lower your taxable income.
To minimize your 2014 taxable income, contribute as much as you can to your retirement fund. Retirement investment vehicles such as 401(k)s and IRAs have a maximum annual contribution limit. For your 401(k), the maximum contribution in 2014 is $17,500. That amount will increase to $18,000 in 2015. If you have an IRA, your maximum contribution in 2014 is $5,500. The money contributed to either retirement fund is tax deferred and will therefore not be included in your current year taxable income.
Many investment losses can be claimed as a tax deduction. Selling stocks and other investments that have lost value during 2014 will allow you to claim the losses against your current year income to minimize your tax payment.
Tuition expenses may be tax deductible. As long as the classes being paid for begin during the first quarter of 2015, the Tuition and Fees deduction or the Lifetime Learning Credit permits you to claim some tuition expenses for those classes against your 2014 income.
Ways to Minimize Your Income
Your employer may defer year-end bonuses until next year. If you are due for a year-end bonus from your employer, a simple conversation may allow you to collect the income in 2015. Deferred income will minimize your tax burden for 2014, but will create additional income and potentially a greater tax burden the following year.
Defer retirement fund distribution until 2015. Distributions from retirement funds such as 401(k)s and IRAs are taxable. Deferring the distribution from your retirement accounts until next year will help to minimize your taxable income for 2014.
Retain investments that have achieved taxable gains. The sale of any investments that have taxable gains will increase your taxable income. Hold these investments until after the first of the year to ensure that you do not have to pay taxes on the investment gains.
The current tax-code for the United States exceeds 70,000 pages of complex rules and regulations. Manhattan Ridge Advisors offers the tips in this post not as a tax guide but as topics to discuss with your tax professional. As with all major financial decisions, we strongly recommend that you seek the advice and help of a financial professional. Please visit our website or contact our office at (212) 370-1111 with any questions.