Year-End Tax Planning Moves for Individuals

By Mayer Nazarian

Your year-end tax planning may be particularly challenging this year, as Congress has yet to act on a host of tax breaks expiring at the end of 2014. The fate of these tax breaks may not be clear until the end of the year, or possibly the beginning of next year.

For individuals, these breaks include the option to deduct state and local sales and use taxes instead of state and local income taxes, the above-the-line deduction for qualified higher education expenses, tax-free IRA distributions for charitable purposes by those age 70 ½ or older, and the exclusion for up to $2 million of mortgage debt forgiveness on a principal residence.

Our firm can help narrow down the specific actions that will help you save valuable tax dollars if you act before year-end. In the meantime, the following checklist outlines possible advisable actions for individuals under the current tax rules.

• Realize losses on stock while preserving your investment position. There are several ways to accomplish this. One example is to sell the original holding then buy back the same securities at least 31 days later.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• Postpone income or defer a bonus into 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income. These include child tax credits, higher education tax credits, and deductions for student loan interest. Note, however, that in some cases, it may pay to actually accelerate income into 2014 and defer expenses into 2015 if your marginal tax rate is expect to be substantially higher next year. 

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don't pay your credit card bill until after the end of the year.

• You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

• If you expect to owe state and local income taxes when you file your return next year, consider increased withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014, if doing so won't create an alternative minimum tax (AMT) problem.

• You may want to pay contested taxes to be able to deduct them this year, while continuing to contest them next year.

• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA, if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, if you leave things as is you will wind up paying a higher tax than is necessary. You can back out of the transaction by re-characterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA. You can later reconvert to a Roth IRA, if doing so proves advantageous.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. 

Don’t hesitate to contact our firm if you’re considering taking any of the above actions to minimize your payments in 2014. In our next article, we’ll discuss specific considerations and advisable actions for businesses under current tax rules.