10 Year-End Tax Strategies

On December 17 Congress voted 76-16 to pass the 2014 tax extenders package and sent it to Obama for his signature. So for 2014 this means we now know that teachers will be able to deduct supplies they buy for the classroom and business owners will be able to expense the purchase of capital assets (Section 179) and, well, there are a total of 55 important tax extenders that expired at the end of 2013 that were up for reconsideration. These extenders are valid only for 2014 tax year.

This is the habit Congress has gotten into over the years – waiting until the very last minute to vote on important tax legislation that becomes retroactive to the beginning of the year. This leaves very little wiggle room for tax planning. Robert Weiss, Global Head of JP Morgan Private Bank’s Advice Lab offers another ten winning tax strategies that were not under the gun by Congress that should also help the average taxpayer.

  1. Harvest investment losses to offset capital gains – Using capital losses to offset capital gains can lower or eliminate capital gains taxes.  Wash-sale rules apply only to losses:  you can repurchase a winning security shortly before or after you sell it.  Now is the time to confer with your financial advisor to determine which stocks should go and which should stay.
  2. Make deferred compensation elections – You have until 12/31 to elect to defer 2015 compensation (if your employer allows) and declare how and when you will receive this compensation.  Meanwhile, the money can grow on a tax-deferred basis.  All contributions you make to the retirement plan before year end are sheltered from income tax.
  3. Establish qualified plans – If you are a self-employed or a business owner, creating a qualified retirement plan can provide you (and your employees) with tax deferral opportunities and retirement benefits.  You have until December 31st 2014 to create most types of plans. You cannot wait until April 15, 2015 to create the plan and make it retroactive to 2014.
  4. Pay 2015 estimated state income taxes this year – Paying estimated state income taxes in December instead of January 2015 creates a deduction that can offset this year’s income.  Prepayment may also reduce the chance of being subject to Alternative Minimum Tax (AMT) in 2015.  However, this strategy is not beneficial if you are paying the AMT for 2014 as it does not allow deductions for state income taxes. Check with your tax pro.
  5. Review stock options – If you will not be subject to the Alternative Minimum Tax (AMT) in 2014, consider exercising vested in-the-money incentive stock options, as this likely will have little or no incremental tax consequence.
  6. Donate to charity – Charitable contributions are deductible from income tax, although limited to a percentage of your adjusted gross income (AGI).  Deductions over that amount can be carried forward for five years.  One tax extender that has passed is the ability to make tax deductible charitable donations from your IRA’s required minimum distribution. Take advantage of that tax benefit.
  7. Make full use of the annual gift-tax exclusion – In 2014 you can make tax-free gifts of up to $14,000 ($28,000 for married couples) without triggering gifts or generation-skipping transfer taxes.  If you don’t use your annual exclusion in a particular year you lose it. Gifts above these amounts may be taxable to the giver or be applied against the estate exemption. Contrary to popular belief, gifts are not tax deductible. Check with your tax pro.
  8. Maximize the lifetime gift-tax exemption – Federal law permits individuals to make tax-free gifts of up to $5.24 million during their lifetimes.  This is $90,000 higher than the 2013 exemption—an amount you can now give away even if you’ve used your entire exemption.
  9. Make gifts beyond the exception limit – It costs less to make a lifetime gift than it does to make a bequest at death.
  10. Consider installment sales – Structure the disposal of a business or major asset as an installment sale.  You won’t have to pay income taxes or capital gains taxes until you actually receive the sale proceeds.  Spreading out the taxable profit over several years may keep you in a lower tax bracket. This can also help keep your modified adjusted gross income below the threshold amount—and help avoid triggering the 3.8% Medicare surtax.