Year-End Tax Moves Part II

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.

Review Your Portfolio
As a general rule, it is seldom a good idea to allow taxes to govern your investment strategy. But, if you’re already considering selling appreciated securities or other investments, selling them by year-end could save you some taxes. If you’re in the 15% tax bracket, you’ll pay 0% on long-term capital gains. In 2014, you’re eligible for the 0% capital gains rate if your taxable income is $36,900 or less if you are single, or $73,800 or less if you are married filing jointly.

If you’re in a higher tax bracket, review realized and unrealized gains and losses and see if gains can be offset by selling some of your losing investments. This strategy becomes crucial as some upper-income taxpayers can be subject to a capital gains tax rate as high as 23.8%.

But, watch out for the “wash sale” rules. If you sell shares at a loss, remember not to purchase this investment again within 30 days. The IRS disallows you from claiming the loss if you buy the same or a “substantially identical” investment within 30 days of the sale.

Empty Your Flexible Spending Account
Use up the money in your flexible spending account (FSA). Yes, the U.S. Treasury Department and the IRS this year changed the long-standing “use-it-or-lose-it” rule; employers can now offer a carry-over of up to $500 in unused health FSA funds to the following year or to continue a grace period option giving employees a 2 1/2 month extension to spend remaining FSA funds. But remember employers aren’t obligated to offer the carry-over or the grace period option.

Keep in mind that you can no longer use your FSA account to pay for over-the-counter medicines, such as aspirin, ibuprofen or allergy medications, without a prescription (except for insulin). But, that restriction does not apply to other nonprescription medical items, such as crutches, contact-lens solution or bandages.

Give To Charity
Donating to a good cause is a great way to celebrate the holiday season. Remember if you want to claim these donations as a tax deduction, you must itemize your deductions. Also, keep records of the donation, including letters from the charitable organization acknowledging your receipt and copies of cancelled checks. You can also use credit or debit cards to make your donations as long as its processed by December 31st.

If you donate a used car worth more than $500, your deduction will be limited to the amount the charitable organization receives when they eventually sell the vehicle. Again, keep good records for these type of donations because the IRS looks at these transactions more closely.

You should also consider giving appreciated stocks to a charity before the year ends. This way you will avoid the potential capital gains tax on the sale of the investment and you will be able to deduct the stock as a charitable deduction at its fair market value on the date of the contribution.

Finally, a tax break that allowed individuals 70 1/2 and older to make a tax-free distribution of up to $100,000 from their IRAs directly to charity expired on December 31, 2013. I do expect Congress to renew this before the year ends. The charitable transfer lets you give the money to charity and count it as a required minimum distribution, but avoid taxes on the withdrawal.

Gifts To Family
You and your spouse can each give up to $14,000 to family members, or any individual, for that matter, without any gift tax implications. I realize with the estate-tax exemption now at $5.34 million, the urgency to transfer wealth is not as crucial as it has been in the past. But, 20 states impose some type of estate or inheritance tax, and most come with much lower exemptions. New Jersey, for example, taxes estates valued at more than $675,000.