Year-End Tax Moves Part I

By Steve Barlotta, CPA

As the end of the year quickly approaches, now is the time to review your 2014 income and expenses and consider some year-end tax moves. Some sound tax planning strategies in the last few weeks of the year can help reduce the amount of money you’ll owe Uncle Sam come tax time.

Estimated Taxes and Witholdings
If you had a substantial change in your income from the prior year, now is the time to review your estimated tax payments. Keep in mind that your estimated tax will include income from all sources like W-2s, self-employment, interest, dividends, capital gains, and rents. To avoid the dreaded estimated tax penalty, you’ll have to prepay 90% of this year’s tax bill or 100% of your tax liability from 2013. However, if your adjusted gross income will exceed $150,000, you will have to pay 110% of your tax liability from 2013 to avoid a penalty.

If you receive compensation from wages and expect a tax increase this year, you can always increase the tax withheld on your last few paychecks to make up the shortfall.

Maximize Pension Contributions
If your company offers a 401(k) plan, try to contribute as much as you can. The maximum contribution you can make for 2014 is $17,500, and if you’re 50 or older, the amount can be increased to $23,000. The limits for 2015 will be $18,000 and $24,000 for those 50 and older. If you’re fortunate enough to get a bonus this year and haven’t maxed out on your contributions, consider directing some extra dollars to your retirement.

If you’re self-employed and haven’t done so already, consider setting up a retirement plan such as a solo 401(k) or a Simplified Employee Pension (SEP). Your business will enjoy a “dollar for dollar” write off and at the same time you’ll be putting away funds for your future, which is crucial.

Accelerate Deductions
If your income increased this year, consider bunching your itemized deductions to cut your tax bill. You can pay your January mortgage, 2015 real estate taxes and fourth quarter state estimated taxes before the year ends. However, if you are subject to the Alternative Minimum Tax (AMT), some of these deductions may be disallowed.

If you’re self-employed you can make deductible purchases and payments now for expenses that aren’t due until next year. If your business needs deductions before the year ends and cash flow is a little tight, consider making purchases for items like computer equipment with a credit card. Even though the payment will not be made to the credit card company until January, you will still be able to deduct the item in 2014.

Required Minimum Distributions
Generally, if you have an IRA or retirement plan account , you must start taking withdrawals, known as required minimum distributions (RMDs). If you turned 70 1/2 in 2014, you have until April 1, 2015 to take your initial RMD. These rules also apply to inherited IRAs. However, Roth IRAs don’t require withdrawals until after the death of the owner.

It is crucial that you take your RMD before the year ends, or else there will be a massive tax penalty; 50% tax on the amount you should have taken as well as the ordinary income tax due on the distribution. Remember, if you have multiple IRA accounts, the RMD must be calculated on the total of all these accounts. You then can choose which account is most beneficial to withdraw from.