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As you plan for your holidays and check your buying and to do lists, it would be a good idea to take a little time and slip among your other lists a short one of measures you can take before the end of the year, or right at the beginning of 2015, to make sure you have a smooth and advantageous tax time ahead.
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But before considering our tips, please remember that there is no year-end tax strategy that fits all taxpayers at all times; it will depend on your specific tax and financial situation.
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This being said, here are some ideas to take into consideration, as the case may be.
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- If you haven’t already funded your retirement account for 2014, do so by April 15, 2015, which is the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2015, you can wait until then to put 2014 contributions into those accounts.
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For 2014, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2014 is $52,000.
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To qualify for the full annual IRA deduction in 2014, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $60,000 or less for singles, or $96,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $181,000.
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Regarding estimated tax payments for 2014, if you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. Plus, you might owe significant interest and penalties, too.
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| According to IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty. |
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| If you make an estimated payment by January 15, though, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then. But if your income windfall arrived after August 31, 2014, you can file Form 2210, Underpayment of Estimated Tax, to annualize your estimated tax liability, and possibly reduce any extra charges. |
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| If you are making quarterly state estimated tax payments make the fourth payment, due January 15, 2015, in December. |
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| Although it is easier to take the standard deduction, you may save a bundle if you itemize your deductions, especially if you are self-employed, own a home or live in a high-tax area. It’s worth the bother when your qualified expenses add up to more than the 2014 standard deduction of $6,200 for singles and $12,400 for married couples filing jointly. |
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Many deductions are well known, such as those for mortgage interest and charitable donations. However, taxpayers sometimes overlook miscellaneous expenses, which are deductible if the combined amount adds up to more than two percent of your adjusted gross income. These deductions include tax-preparation fees, job-hunting expenses, business car expenses and professional dues.
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You can also deduct the portion of medical expenses that exceed 10% percent of your AGI. There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.
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Do not forget the home office deduction. The eligibility rules for claiming a home office deduction have been loosened to allow more filers to claim this break. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there, but must use the space exclusively for business.
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Many taxpayers have avoided the home office deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem.
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| Do not forget your charity gifts and read our recent newsletter to make sure they count on your tax return as well. |
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For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2 and 1099s, receipts and so on.
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| If you really want to make tax season go smoothly, get started now and follow the following easy steps: |
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- Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return;
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- Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important;
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- Collect receipts and information that you have piled up during the year;
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- Group similar documents together, putting them in different file folders if there are enough papers;
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- Make sure you know the price you paid for any stocks or funds you have sold. If you don’t, call your broker before you start to prepare your tax return. Know the details on income from rental properties. Don’t assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files.
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As always, and perhaps most important of all, do not take any important action on year-end strategies without first discussing them with your tax professional or financial consultant.
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