Six Best Tax Planning Ideas for Individuals

UB Voices By WSRP

By Val Oveson, Tax Partner | WSRP Salt Lake City

December 2, 2014

Before the hustle and bustle of the holidays sets in, it’s a good idea to consider what you can do to lower your 2014 tax bill. Here are six simple tax-saving strategies that you can implement before year end.

1. Game the Standard Deduction

If the combined total of your annual itemized deductions is usually close to the standard deduction amount, consider the strategy of bunching together expenditures for itemized deductions every other year. Itemize in those years to deduct more than the standard deduction. Then claim the standard deduction in the years that your itemized deductions are lower.

In the end, you will save substantial money by increasing your cumulative write-offs. That’s because you’ll claim higher itemized deductions in alternating years and relatively generous standard deductions in the other years. So regardless of what happens with tax rates, you’ll come out ahead.

For 2014, the standard deduction is $12,400 for married joint-filing couples, $6,200 for singles, and $9,100 for heads of households. For 2015, the projected standard deduction amounts are $12,600, $6,300, and $9,250, respectively.

2. Prepay Deductible Expenditures

If you itemize deductions, it could make sense to accelerate some deductible expenditures to produce higher 2014 write-offs. This generally works if you expect to be in the same or lower tax bracket next year.

If you Game the Standard Deduction (above), prepaying deductible expenditures makes sense in the alternating years in which you itemize. This strategy can maximize deductible expenditures in the years that you itemize your deductions -- and minimize deductible expenditures in the years that you claim the standard deduction.

3. Consider Deferring

It may also pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2015. For example, if you’re a self-employed, cash-basis taxpayer, you might postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive these payments until early 2015.

Deferring income can also be helpful if you’re affected by unfavorable phase out rules that reduce or eliminate various tax breaks, such as the child credit or higher-education tax credits. By deferring income every other year, you may be able to take more advantage of these breaks every other year. (This also works well in conjunction with the Game the Standard Deduction strategy, above.)

4. Sell Loser Stocks Held in Taxable Accounts

Selling losing investments held in taxable brokerage firm accounts can lower your 2014 tax bill, because you can deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment, alimony or interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2015 and beyond.

5. Convert Traditional IRA into Roth IRA

The best scenario for this strategy is when you expect to be in the same or higher tax bracket during retirement. There is a current tax cost for converting, because a Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. After the conversion, all the income and gains that accumulate in the Roth account, and all qualified withdrawals, will be exempt from federal income taxes. Special qualification rules apply. Check with your tax advisor if this looks interesting to you.

6. Donate Stock to a Charity

If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve owned for over a year, consider donating them to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

Consult Your Tax Professional

These tax-saving tips are generally geared toward deferring income and accelerating deductions to minimize 2014 taxes. This approach may also help minimize or avoid phaseouts of various tax breaks based on a taxpayer’s AGI (or MAGI). As always, however, yearend tax planning doesn’t occur in a vacuum. It must take into account each taxpayer’s particular situation and planning goals. While most taxpayers will come out ahead by following the traditional approach of lowering the current year’s taxable income, others with special circumstances may do better by accelerating income and deferring deductions.

To further complicate yearend tax planning in 2014, many tax-saving opportunities expired at the end of 2013, such as the higher education tuition deduction, the option to deduct state and local sales taxes and the tax credit for energy-efficient home improvements. If Congress decides to reinstate the expired tax breaks, many more opportunities will be available for individuals seeking to lower their 2014 tax bills. Consult with your tax adviser before year end to devise a tax-saving plan that most effectively meets your tax planning goals and factors in the latest tax rules.

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