Year End Tax Planning 2014
Which Is Worse: Year-End Tax Planning Or A Root Canal?
At least there are ways you can make the first of these a lot less painful. Year end tax planning matters because most individual and small business taxpayers are on the cash method of accounting, meaning income is recorded when received and expenses when paid, and therefore little can be done for 2014 once 2015 begins.
Year-End Planning Ideas For Individuals
Examine Your Tax Withholding
One of the most common questions is, “Why am I paying higher income taxes than my neighbor?” Which is usually followed by an explanation of how they have similar jobs and families; but the neighbor received a refund and they owed money.
Everyone enjoys getting some money back, but comparing refunds is not the way to find out who is paying more overall. Why? There are many variables – income, dependents, deductions, tax and tax credits that go into a tax return; making it unusual for two different taxpayers “with similar situations” to have a similar result. It rarely works out that way and may be as simple as one had more taxes withheld during the year.
One of the first steps in yearly tax planning is to look at your current earned wages or other income, how much has been withheld for income taxes, and what quarterly estimated taxes have been paid. Next, you need to make a reasonable projection of what you can anticipate through the end of the year. Then add to this income your projection of other income (i.e., dividends, capital gains, etc.) for the entire year. At this point, you can see if you are likely to owe taxes for 2014 or get a refund. You may then consider adjusting your withholdings or estimates.
Towards year-end, if you are due a bonus, ask if your employer will defer it until January. This might give you more time in 2015 to do some more effective tax planning.
Check Your Investments
Do you have any capital gains for this tax year? If you already have taxable gains from selling stock, real estate, etc., see if you have unrealized losses in other assets that you can sell before year end to offset those gains. Although it’s not favorable to lose money on your investments, declaring capital losses can help offset capital gains and reduce your tax liability.
If you are thinking of selling stock, consider postponing the gain until January to avoid the tax in 2014. But first, make the right decision from an economic or investment standpoint. Make sure the decision benefits your overall financial objectives.
One of the best tax planning opportunities is to maximize your retirement contributions. Make elective deferrals to your 401(k) account, and you can reduce your income by up to $17,500 ($23,000 if you are at least 50) in some cases. Money you contribute to your 401(k) plan is excluded from your income, which helps lower your tax bill. This is a great long-term savings option. In addition, many companies will match their employee contributions up to a certain percentage or dollar amount. That is like getting a bonus from your company which will be taxed much later when the funds are withdrawn. No brainer here!
If you work and are not covered by a retirement plan, you can make an IRA contribution in 2015 before you timely file your 2014 return. Those contributions are deductible in 2014. In other words, you can make 2014 IRA contributions any time from Jan. 1, 2014, to April 15, 2015.
Year-End Planning Ideas For Small Businesses
Reduce Self-Employment Taxes
Certain strategies may be used to help reduce the burden of self-employment taxes for unincorporated businesses. For example, do you have school aged children (under 18)? If so, consider hiring them to work for you part-time. You can deduct the amount you pay your child(ren) for work performed, which will reduce your overall income for self-employment tax purposes. In addition, no Social Security or Medicare taxes are required on their earnings and you have the ability to contribute to an IRA for the child.
When In Doubt, And Sometimes Even If You Are Certain, Ask Your Tax Advisor And Do It Before Year End!
I can almost guarantee that any tax savings strategies you implement from having your tax advisor do some year-end planning with you will more than offset any invoice received, so don’t be shy. Now is the time to plan not just for this year’s tax bill but the future as well.
Let’s say you implement a pension plan which generates a federal tax savings of $5,000. This savings can be a PER YEAR tax savings, so let’s say you keep the plan for twenty years, you have now cumulatively saved $100,000 in income tax. In addition, the contributions to the plan belong to you and any eligible employees so you also have been investing for retirement at the same time.
Timing on this is important, wait until the tax return meeting and you can miss an opportunity to open the plan before year end as may be required.
Determine Health Care Tax Credit Eligibility
You may be eligible for the Small Business Health Care Tax Credit if you cover at least 50 percent of your full-time employee’s health care premium costs (purchased through the SHOP marketplace) AND you have fewer than 25 full-time equivalent employees with average annual wages of less than $50,000. For 2014, the maximum credit is 50 percent of premiums paid for small business employers (35 percent for tax-exempt employers) and this is a refundable credit. If you think you meet these requirements, review the full details at www.IRS.gov and consult your tax advisor.
With over 21 years of experience helping small businesses and individuals achieve lower tax rates, Adam Urdang, CPA and Managing Member of Urdang & Company CPAs LLC, is glad to share some timely advice from his experience to help you lower your 2014 taxes. Note that this article is general in nature and does not apply to all taxpayer situations, as always it is best to consult your tax advisor before implementing any of the ideas in this article. The information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding penalties.