It’s tempting not to think about taxes this time of year. After all, the holidays can be all consuming and tax day is still months away. But making some financial moves now can pay off in a major way next April.
“Year-end tax planning can make a big difference, resulting in savings of thousands or even hundreds of thousands of dollars," says Karen Goodfriend, a CPA with KK Wealth Advisors, LLC in Los Altos, Calif.
Here are five smart year-end tax moves to make right now.
1. Be smart about charitable donations. If you itemize your taxes, you can take a write-off for money that you give to charity, as long as you get a receipt and a written statement from the charity. You can make your donation even more valuable, though, by giving away stocks instead of cash, especially since stocks are at record highs this year.
Here’s how it works: Instead of writing a check for $5,000 to a favorite charity, you could transfer a stock to a charity’s brokerage account that you purchased for $2,500 but is now worth double that amount. As long as you’ve held the stock for more than a year, you’re entitled to a full tax deduction of $5,000 and can then avoid having to pay capital gains on the sale of the stock. Everyone wins, since the charity isn’t required to pay capital gains if they sell the stock. “Stock gifting to charities is one of the most effective means of gifting from a tax standpoint to your favorite charity,” says Joseph D. Clemens, a certified financial planner and enrolled agent in Denver, Colo.
2. Take advantage of your home. Expenses like property taxes and mortgage interest are deductible – and it can pay to make a few advance payments. Property taxes are usually owed in two installments, with the second payment coming after the first of the year. Paying the entire bill at once by year-end allows you to deduct both portions of your property taxes on this year’s taxes. “It’s a lot to pay, but if you do have extra cash, it's a good way to maximize your deductions,” says Gil Armour a certified financial planner with SafePoint Financial, Inc., in San Diego.
The same goes for mortgage payments. Consider making the January payment in December in order to write off the additional interest on your 2013 taxes.
If you’ve been putting off an eco-friendly home improvement like new windows or an energy-efficient air conditioner, see if you can get the project done in the next few weeks. The $500 residential energy efficiency tax credit expires at the end of this year.
3. Do spring cleaning in December. You can turn that board game or Barbie doll that your children have long tired of into cash if the items are donated to agencies like Goodwill. But you can’t just drop off a garbage bag full of toys and clothes. You need to list each item you’re donating and its value. For a bigger write-off, consider donating larger items like furniture or jewelry. You may want to get high-end items appraised; for everything else, estimate the value using this Turbo Tax app. For donations worth more than $5,000, the charity will need to sign an IRS form 8283, for noncash charitable contributions.
4. Increase the contribution to your retirement or college saving plans. You can put up to $17,500 tax-free into a 401(k) plan this year ($23,000 if you’re age 50 or older). If you’re not eligible for a 401(k) plan at work, you may be able to put up to $5,500 ($6,500 for those 50 and over) tax free into an IRA, depending on your income. Maxing out your contributions is an easy way to bolster your retirement savings while reducing your total taxable income. You must put money into your 401(k) account by year-end in order to write it off, but you have until your filing deadline to stash it in an IRA.
Contributions to 529 college savings accounts are not deductible at the federal level, but many states offer deductions if you put the money into a state-run account where you reside. Check out your state’s 529 tax benefits here.
5. Lock in investment losses. Stocks had another banner year in 2014, and you may be sitting on some hefty capital gains. If you happen to have holdings that lost value this year, selling those could help you offset the taxes on capital gains. Losses in excess of gains can be used to offset up to $3,000 of income this year. If you have additional unused losses, you can use them in future years. Note, that you have to wait 30 days after selling a stock or fund before buying it back again.
Likewise, if you have holdings that increased significantly in value, hold off on selling them until after the New Year.
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