You may be able to save money on your 2014 taxes by making a few well-timed moves by Dec. 31. Here are five areas to examine with your tax advisor before the end of the calendar year:
1. Deductible expenses. If your adjusted gross income (AGI) exceeds a certain level, the amount of your itemized deductions will be reduced. For 2014, the reduction applies to single filers with AGI greater than $254,200 and to married couples filing jointly with AGI greater than $305,050. Above these levels, most (but not all) itemized deductions are reduced by 3% of the amount by which AGI exceeds the threshold, up to a maximum reduction of 80%.
If your AGI will exceed the applicable threshold this year, consider deferring some deductions to next year. For example, you could wait until January to make a charitable contribution or pay deductible property taxes. Conversely, if your AGI will be below the applicable threshold, think about accelerating deductions into this years
2. Timing of income. If you can control when you receive income, consider deferring the receipt of income from December until January to potentially reduce this year’s taxes. For example, if you receive a year-end bonus, ask your employer to pay it in January instead of December.
And if you’re self-employed, wait until late December to send out invoices. If you receive checks before Dec. 31, you’re considered to be in “constructive receipt” of the income and must include it in your 2014 taxable income — even if you wait until January to deposit the checks
3. The alternative minimum tax (AMT). The AMT is a separate tax calculation that treats certain tax breaks and income items differently (generally resulting in higher taxable income) and has only two tax rates: 26% and 28%. If your AMT liability is higher than your regular tax liability, you must pay the AMT. There is an AMT exemption, which for 2014 is $52,800 for single filers and $82,100 for joint filers. But the exemption phases out above certain income levels.
It’s wise to determine before year end if you’ll likely be subject to the AMT this year — or if the deduction and income strategies you’re considering might trigger it. If so, you may be able to adjust your strategies to avoid AMT exposure or at least minimize the impact. After Dec. 31, it’s too late to do any AMT tax planning.
4. Retirement plan contributions. If you participate in a 401(k) retirement plan at work, you can reduce your 2014 tax bill by making additional contributions by Dec. 31. Contributions are pretax, reducing your taxable income for the year. In 2014, you can contribute up to $17,500 to your 401(k), or $23,000 if you’re 50 years of age or over.
You have until April 15, 2015, to make potentially deductible 2014 contributions to your traditional IRA. For SEP-IRAs, you have until the due date of your return for tax year 2014, including extensions.
5. Affordable Care Act (ACA) taxes. The ACA imposes two new taxes on high earners: the 3.8 % net investment income tax (NIIT) and the additional 0.9% Medicare tax. The NIIT applies to net investment income to the extent that your modified AGI exceeds the applicable threshold — $200,000 for singles and $250,000 for joint filers. The additional Medicare tax applies to wages and self-employment income above those same thresholds.
Possible planning strategies include shifting income-producing investments into tax-deferred retirement plans like 401(k)s and IRAs and adjusting salary and bonuses to fall below the income thresholds.