Although you don’t need to officially file your taxes until April 15, 2015, there are numerous steps individuals and businesses should take before the end of the calendar year 2014 to help reduce the amount of taxes owed to the IRS next spring.
Unfortunately, gridlock in the U.S. Congress did not make it easy to predict which tax breaks would be extended as we reach tax season. Lawmakers only acted in the last month on deductions for college tuition and private mortgage insurance payments, among other deductions.
There are some things you should consider doing before the end of the year to better manage your tax bill. These include the following:
Income deferment: If you make more than $406,750 as a single person or $457,600 for a married couple filing jointly, you fall into the top federal tax rate category of 39.6 percent. As you look at the amount of income you’ll receive by the end of the year, you should think about whether it will put you over the edge of this top tax bracket. If so, consider asking your employer to delay your bonus until January or contributing more money to a tax-deferred retirement plan. If you own a business, you might consider holding on additional invoices until 2015 begins.
401(k) contributions: Regardless of your tax circumstances, it’s always a good idea to contribute as much as possible to your 401(k) or other retirement savings plan. Most of these contributions occur pre-tax, and thus you’ll be able to report a lower amount of income to the IRS. You will also see greater tax-deferred earnings the earlier you contribute to the account.
IRA contributions: Like a 401(k), contributing to an individual retirement account allows you to deduct some or all of the amount on your taxes. Even if you are not able to claim any tax credits this year, you are still taking the steps necessary to protect yourself and your loved ones in the years to come.
Capital losses: If your portfolio includes assets that have decreased in value, you may be able to offset the tax impact of capital gains you have experienced over the past year. In years in which your losses total more than your gains, you may reduce your regular income amount by up to $3,000. It’s also possible to carry more than this amount into future tax years.
Mortgage payments: If you own a home, consider making your January mortgage payment and property tax payment before the end of 2014. This will allow you to deduct the interest on the mortgage and your property tax amount on your upcoming return.
Charitable donations: One of the best ways to reduce your tax liability is to make a donation to a charitable organization, which may come in the form of a monetary contribution, furniture, household goods, clothing, motor vehicles and a wide range of other items. You may even choose to donate stocks that you’ve held for at least 12 months.
Although tax season hasn’t quite begun, keep these concepts in mind as you round out 2014, and work with an experienced tax planning attorney if you have any questions or wish to receive sound legal guidance.
BoltNagi is a well-established and widely respected and well-established estate and tax planning law firm serving individuals, businesses and organizations throughout the U.S. Virgin Islands.