Financial Tax Planning Investment Adviser Chapel Hill Cary Raleigh RTP

Considerations for End of Year Tax Planning

In Asset Allocation, Charitable Gifting, General Financial Planning, Investments, Personal Financial Planning, Retirement Planning, Tax by Chip Hymiller

As the year winds down, it is always a good idea to review your tax situation to determine if there are ways to reduce your tax liability, or take advantage of financial planning opportunities that may exist.  Here are several items that may warrant consideration prior to the end of the year:

Make charitable contributions using gifts of appreciated stock instead of cash.  Most charitable organizations, including universities, churches and other non-profit organizations, will accept gifts of stocks or mutual funds.  In addition to benefiting a worthy charity, gifting appreciated investments helps you avoid paying taxes on your investment gain while receiving an income tax deduction for your gift.

Consider converting your IRA into a Roth IRA.  For people who have significant itemized deductions, but only modest levels of income, this strategy can help you convert a portion of your IRA into a Roth (which has more favorable distribution characteristics) without paying penalties on the money.

Realize Investment Gains to Take Advantage of the 0% Capital Gains Rate.  For the last few years, taxpayers in the 10% or 15% ordinary tax bracket pay 0% on long-term capital gains.  So, those in the lower tax brackets need to scrutinize their personal portfolios (not retirement accounts) to see if any gains can be harvested with no federal tax impact.

Harvest tax losses in your investment portfolio.  If you have unrealized losses in your personal investment portfolio (not retirement accounts), this may be the time to sell those positions and reinvest the proceeds in another investment.  You can use the loss to offset capital gains that have been realized and decrease your overall tax liability.

Maximize contributions to your employer sponsored 401(k) or other retirement plans.  Making contributions into most retirement plans can help reduce your taxable income and ultimately your overall tax liability.  Maximum contribution levels vary depending on your specific plan type, but for 401(k) plans, the maximum deferral in 2014 is $17,500 ($23,000 if you are over age 50).

Review your withholding and estimated payments to make sure you are not subject to the underpayment penalty.  To avoid the penalty for 2014, your total payments must equal the lesser of (1) 90% of your current year tax liability or (2) 100% of the 2013 tax liability (110% if your AGI exceeds $150,000).

Make sure you have health insurance coverage.  Beginning in 2014, absent a qualified exemption, every individual is required to have health insurance or they will face a penalty on their tax return.  The maximum penalty is the greater of 1% of income or $95 per individual not covered.

Make your January state tax estimate in December.  In doing so, you will get an added federal deduction therefore reducing your overall federal tax bill.  As a word of caution, you should carefully consider if the alternative minimum tax (AMT) is of concern in your specific situation.

Make your January mortgage payment in December.  Paying your mortgage payment early increases the amount of interest expense paid for the year and thus increases your itemized deductions.  This is especially helpful when your current year income is higher than your anticipated income next year.

Be cognizant of phase-outs on itemized deductions and exemptions.  If you are thinking about making additional charitable contributions or extra mortgage payments, you may not be able to take the full deduction.  Phase-outs for personal exemption and itemized deductions begin with adjusted gross incomes (AGI) of $254,200 for individuals and $305,050 for married couples filing jointly.

For our clients, we will be considering all these options (plus a few more!) as we analyze their year-end tax situation. If you have any questions regarding your specific tax situation, or would like to learn more about the tax saving ideas listed above, please contact our office today.