Personal Wealth Management
Year-end Tax Planning Ideas
With the New Year rapidly approaching, it may be prudent to consider one or more of the following strategies. Because you only have until December 31, 2014 to make investment moves to help reduce your tax liability for the 2014 tax year.
- Boost your 401(k) contributions. If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford. You typically contribute pretax dollars, so the more you invest, the lower your taxable income. Your earnings also grow on a tax-deferred basis. For 2014, you can contribute up to $17,500, or $23,000 if you are 50 or older. (These same limits apply to 403(b) and 457(b) plans.)
- Be generous. Your cash contributions to qualified charities may be tax deductible. But you might get even bigger tax breaks by donating appreciated assets. Suppose, for example, that you purchased shares of ABC stock for $1,000 and they are now worth $10,000. If you were to give these shares to a qualified charity, and you are in the 28% tax bracket, you would get a $2,800 tax deduction, based on the current market value of the donated shares.
- Donate your required minimum distribution. The Tax Increase Prevention Act of 2014 extended some popular tax breaks until December 31, 2014. For investors age 70-1/2 or older, this includes the ability to make Qualified Charitable Distributions (QCDs) of up to $100,000 from Required Minimum Distributions (RMDs) to a qualified charity. The distribution counts toward RMD requirements and may be excluded from gross income for the 2014 tax year if made directly from the IRA trustee before December 31. (Spouses filing jointly can combine QCDs to exclude up to $200,000 from gross income.) Note that QCDs may not be deducted as a charitable contribution on federal income tax return, as that would be double-dipping.
- Contribute to a 529 college savings plan. 529 plan contributions may be tax deductible in your state. When you contribute to a 529 plan, your earnings grow tax-free, provided they are used for qualified higher education expenses. (However, distributions not used for qualified expenses may be subject to income tax and a 10% penalty.)
- Sell your “losers.” If you own investments that have lost value, you can sell them before 2014 ends and use the tax loss to offset some capital gains you may have earned in other investments. If you have zero capital gains, you can use up to $3,000 of your tax losses to offset other ordinary income. And for a loss greater than $3,000, you can “carry over” the excess and deduct it from your taxes in future years. If you still like the investment sold at a loss, you must wait 31 days before repurchasing it to avoid violating IRS “wash sale” rules.
- Delay selling your “winners.” Capital gains can increase your adjusted gross income — and, consequently, your tax bill. So if you are considering selling an asset that has increased in value, such as a stock, you may want to wait until January so the gain will be realized next year.
- Postpone purchasing mutual fund shares. Many mutual funds pay capital gains distributions in December. So, if you were to buy shares just before the distribution date, you may get a larger distribution, but you will owe capital gains taxes on the money you invested without receiving much benefit from your investment. To avoid this potential problem, ask for the date of the distribution and consider delaying additional investments until afterward.
In addition to these year-end strategies, you may also want to increase your contributions to your traditional or Roth IRA, although you actually have until April 15 to contribute for the 2014 tax year. You can put in up to $5,500, or $6,500 if you are 50 or older. Traditional IRA contributions will reduce your taxable income for 2014. Roth IRAs will not reduce your current taxable income; however, qualifying distributions in the future may be tax-free.
Implementing one or more of these strategies may help you accomplish two objectives — make progress toward your financial goals while brightening your outlook for the 2014 tax year. That may be a pretty good combination.
RBC Wealth Management is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor.
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