Since saving money is my “mantra” as well as the purpose of this blog, let's examine some ways you can increase your net income and save on your tax bill for 2014 and beyond. It's really important to start now to review all the opportunities for saving money, since in most cases (for non-business), December 31st is the deadline for adjustments that you will report by tax day next April. If you itemize your deductions, many of these listed should be familiar.
So while Santa is busy making his list and checking it twice, let's take a look what should be on your year end tax planning list:
- Take a good look at 2013 (last year's) tax returns and check for any opportunities you may have missed, errors you need to correct, or items you can carry over for 2014. Double check your W-4 form to adjust any major withholding so your weekly paychecks get fatter and your year end interest-free loans called refunds get smaller. When it come to tax returns, I have to tell you that I'm usually appalled when I see that people have a smile on their face when they get a large refund from the government each year after having overpaid their taxes through their regular paychecks. The goal of your tax bill should be to pay what is required, and in my world that means planning ahead your income and deductions so that you owe no additional taxes and don't receive any refund at tax time. In reality, a refund check is your money, given back to you with no interest! You have lent the government money all year for free. Does that make any sense? If it does, please send me your interest free money and I'll be glad to send you a refund next year! 😉
- Charitable donations such as cash, stocks, bonds, clothing, furniture, automobiles, appliances and food need to be made before year end to be deducted from your 2014 income.
- Make sure you are maxing out your retirement plan contributions (401k or any approved plan, even IRA CD's) before the tax deadline. Yes, you have until April to do this, but remember that the sooner you do, the sooner your money starts to grow so don't wait until the last minute. If you're under age 50, you can contribute up to $5,500 this year and if you're over 50, it's $6,500 that may be deducted from your gross income.
- If you have an FSA (Flexible Savings Account) through your employer, make sure you are using it all up (up to $2,500 is allowed each year) before the year end, or you may lose any remainder. There are some exceptions to extend the deadline for a few months or carry over a small amount, but that is not commonplace. Don't confuse an FSA with an HSA (Healthcare Savings Account) which carries over year to year.
- If you are required to take a distribution from an IRA plan (minimums are a must for those 70 ½ years old), you must do so by year end or suffer a tax penalty of up to 50% of the amount.
- For tax purposes, you may be able to defer income until January and/or increase expenses for December. Doing so may lower your tax bill now if you 2014 income is expected to be greater than next year's or if you have another reason to need to save this time around. As an example, you may have a year-end commission or bonus that can be deferred a few days, or a mortgage payment you can make in December instead of January 1st.
- If you're a parent or grandparent, you can set up a 529 plan (College Tuition Savings Plan) before year end. The contributions are tax deductible for federal tax (and in some states as well) and go toward paying college costs when you need them. Check details online or with a financial advisor.
- It's the time of year for gift giving! This year, you may give up to $14,000 to any individual you'd like (or $28,000 if you are a tax filing couple), and although it's not a tax deduction for you, it will save the recipient any tax on that gift and save future estate taxes down the road.
- Consider converting your IRA from a traditional to a Roth IRA (there is no cost to convert) if you qualify and your tax bracket projection shows a need to have untaxed income when you are 59 ½ years old or retired. When you are retired, you may not have as many ways to reduce your taxes through deductions, and in a perfect scenario, you may be able to avoid the taxes with the Roth plan while working and be tax free when you begin to withdraw after age 59 ½.
- Make sure you have health insurance coverage for 2015. If you don't currently have health insurance coverage, or your policy is being discontinued, or even if you'd just like to compare plans to make sure you have the best value, you have until December 15th to enroll in a plan for coverage beginning January 1st (unless you're Medicare-eligible in which case your deadline has passed). Failure to do so may result in an individual shared responsibility payment on your tax return next year.
And now…for number 10 ½. It's too early to file your tax returns, but it's not too early to download forms, figure out what your tax responsibility is, and research online sites that allow you to save money on your tax preparation. There are income restrictions to file online for free with FreeFile (your adjusted gross income for your household must be under $58,000), but many online sites offer free federal tax returns and only a small fee for state (usually $10-25), so you can save in comparison to an accountant. For the fastest returns, you can e-file and have any refund made directly to your bank account.
I know with the hustle and bustle of the holidays, taxes may be the last thing on your mind. But spending just a few minutes on year end tax planning now can save you money later.
So what's your strategy for your 2014 taxes?