Year-end tax planning is rarely, if ever, simple. This year is certainly no exception. As we approach the end of 2014, certain tax provisions have remained in limbo, perhaps depending on the results of the midterm elections. Nevertheless, this does not mean you should stand idly by. Here are seven timely tax strategies that may be available to you or other family members this year.
1. Maximize deductions for charitable gifts. As a general rule, you can deduct the full amount of cash (or cash-equivalent) gifts made to qualified charities if you keep the proper records. Also, you may deduct the fair market value of gifts of appreciated property if certain requirements are met. Caveat: Special limits may apply, including a possible reduction in deductions for certain high-income taxpayers.
2. Balance capital gains and losses. Typically, you might realize capital gains from sales of securities or other property to offset capital losses or harvest losses to offset prior gains. The maximum tax rate on long-term capital gains is 15% (20% for those in the top 39.6% ordinary income bracket). Conversely, any excess loss may offset up to $3,000 of ordinary income before any remainder is carried over to next year. Note: A 3.8% surtax on net investment income (NII) may also apply.
3. Factor in the AMT. Despite recent increases in exemption amounts for the alternative minimum tax (AMT), many taxpayers still must pay this “stealth tax.” Generally, the AMT applies if you have an overabundance of “tax preference items,” especially if you reside in a high-tax state. Have a review of your AMT liability conducted to determine whether you should shift income items or deductions at year-end.
4. Prepay state and local income taxes. Absent other circumstances, the conventional wisdom is to reduce your current income tax bill whenever possible. Therefore, you might arrange to prepay any state and local income taxes due on January 1, 2015, before the end of the year. As a result, you can increase the annual deduction for state and local taxes.
5. Bunch up medical expenses. For 2014, the threshold for deducting medical expenses for most working taxpayers is 10% of adjusted gross income (AGI), although it remains at 7.5% of AGI for those age 65 or over. If you have a shot at a deduction, move elective expenses, such as dental cleanings and physical examinations, into this year. Otherwise, you might as well postpone elective expenses to next year.
6. Secure dependency exemptions for kids. Generally, you can claim a dependency exemption for children under age 19 or full-time students under age 24. However, you must provide more than half the child’s support to qualify. When necessary, increase support at year-end to ensure that you clear the half-support mark this year.
7. Split income with family members. When appropriate, transfer income-producing property to low-bracket family members. Note that a 0% rate on long-term capital gains applies to taxpayers in the two lowest ordinary income tax brackets. Caveat: Under the kiddie tax, unearned income of a young child generally is taxed at your tax rate to the extent it exceeds $2,000 in 2014.
Depending on your situation, you may use one or more of these strategies or others. Have a year-end plan tailored to your needs.