Year End Tax Planning
Armstrong Advisory Group
144 Gould Street, Suite #210
Needham, MA 02494
What is year-end tax planning?
As the end of the tax year approaches, you can probably get a rough idea of how much you’ll owe in taxes. To lower your tax bite, it is wise to take certain steps at year-end. Numerous strategies exist to help you, including reviewing professionally developed year-end tax checklists, performing a marginal tax rate analysis to ensure that you won’t be pushed into a higher tax bracket unnecessarily, and postponing income and accelerating deductions (or vice versa).
Year-end tax planning and also investment decision-making may sometimes result in substantial tax savings. Year-end tax planning primarily concerns the timing and the method by which you report your income and claim your deductions and credits. The basic strategy for year-end planning is to time your recognition of income so that it will be taxed at a lower rate, and to time your deductible expenses so that they may be claimed in tax years when you are in a higher tax bracket. In a nutshell, you should try to do the following:
- Recognize income when your tax bracket is lower
- Pay deductible expenses when your tax bracket is higher
- Postpone the payment of tax whenever possible
How can checklists help you?
Tax planners develop checklists to guide taxpayers toward year-end strategies that might help to reduce their taxes. These checklists offer several suggestions and are arranged in categories, such as “Retirement Planning Checklist.” The checklists trigger tax-savings ideas that may not have occurred to you. For instance, one suggestion may be to shift income at the year’s end to family members who are in lower tax brackets to minimize your overall taxes. Another suggestion might be for a married person to calculate his or her taxes two ways, using both married filing jointly status and married filing separately status, in order to minimize income tax liability.
How can a marginal tax rate analysis help you to save taxes?
A marginal tax rate analysis involves understanding the difference between your marginal tax rate and your effective tax rate. If you know the rate at which your next dollar of income will be taxed, you may be able to engage in planning that will prevent you from being pushed into a higher tax bracket unnecessarily. If a higher tax bracket seems likely, you may be able to undertake certain strategies (such as deferring income and accelerating deductions) to lower your federal income tax burden.
What should you know about income and deduction strategies?
As stated earlier, you want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket. In general, taxpayers have a certain amount of control over the timing of income and expenses. Although deferring the recognition of income is usually desirable, there may be occasions when you might want to accelerate the recognition of income. For example, you may want to accelerate the recognition of capital gains if you have capital losses this year and need to offset them with capital gains. Also, you might want to accelerate income and postpone deductions this year if you expect to be in a higher marginal tax bracket next year.
Conversely, there are several reasons why you might want to postpone income and accelerate deductions this year. For instance, you might expect to be in a lower tax bracket next year because of retirement or unemployment. Also, if you lower your income enough this year, you may pay tax at a lower rate if you position yourself into a lower marginal tax bracket.
Appropriate Checklists for Year-End Tax Planning
What are appropriate checklists for year-end tax planning?
Tax planners often develop checklists to guide taxpayers toward year-end strategies that might help reduce taxes. Typically, suggestions are grouped into several different categories, such as “Filing Status” or “Employee Matters,” for ease of reading. When year-end approaches, it might be wise to review each suggestion under the categories that may apply to you.
Filing status and exemptions
- If you’re married (or will be married by the end of the year), you should compare the tax liability for yourself and your spouse based on all filing statuses that you might select. Compare the results when you file jointly and when you file married separately. Determine which results in lower overall taxation.
- Determine whether you’re entitled to claim a dependency exemption for a parent or other relative. You will need to have contributed more than half of that individual’s support during the year, and other conditions may also apply.
- If you’re claiming a dependency exemption for a child who is 19 or older (age 24 or older if a full-time student), make sure that the child’s gross income doesn’t exceed $3,950 (for 2014, $3,900 for 2013).
- If you and several other people financially support someone but none of you individually qualifies to claim the individual as a dependent, you should consider making an agreement with all of the other parties to ensure that at least one of you can claim the individual as a dependent.
Family tax planning
- Determine whether you can shift income to family members who are in lower tax brackets in order to minimize overall taxes.
Tip: The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those age 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
- Consider making gifts of up to $14,000 per person federal gift tax free under the annual gift tax exclusion. Use assets that are likely to appreciate significantly for optimum income tax savings.
- Take advantage of tax credits for higher education costs if you’re eligible to do so. These may include the American Opportunity (Hope) credit and the Lifetime Learning credit. Note that these credits are based on the tax year rather than the academic year. Therefore, you should try to bunch expenses to maximize the education credits.
Tip: If you have qualified student loans (and meet all necessary requirements), you may be entitled to take a deduction for the interest you paid during the year. The maximum amount you can deduct is $2,500.
- Self-employed individuals (who generally use the cash method of accounting) can defer income by delaying the billing of clients until next year. You may also be able to defer a bonus until the following year.
- Use installment sale agreements to spread out any potential capital gains among future taxable periods.
- Employees can deduct their business expenses as long as these expenses exceed 2 percent of annual adjusted gross income (AGI). Therefore, attempt to bunch as many of these business expenses as possible during the current year in order to maximize the deductions.
Business income and expenses
- Accelerate expenses (such as repair work and the purchase of supplies and equipment) in the current year to lower your tax bill.
- Increase your employer’s withholding of state and federal taxes to help you avoid exposure to estimated tax underpayment penalties.
- Pay last-quarter taxes before December 31 rather than waiting until January 15.
- Make sure that you meet the required threshold percentages of your AGI to deduct expenses by “bunching” miscellaneous expenses into the same year.
- If you have significant business losses this year, it may be possible for you to apply them to the prior year’s returns to receive a net operating loss carryback refund. If you had significant income in prior years, you should maximize the current year’s losses by deferring income if possible.
- In certain circumstances, it may be possible for the full cost of last-minute purchases of equipment to be deducted currently by taking advantage of Section 179 deductions .
- Generally, you are able to make a contribution to your retirement plan at any time up to the due date (plus extensions) for filing a given year’s tax return.
- Pay attention to the changes in the capital gains tax rates for individuals and try to sell only assets held for more than 12 months.
- Consider selling stock if you have capital losses this year that you need to offset with capital gain income.
- If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain.
Personal residence and other real estate
- Make your early January mortgage payment (i.e., payment due no later than January 15 of next year) in December so that you can deduct the accrued interest for the current year that is paid in the current year.
- If you want to sell your principal residence, make sure you qualify to exclude all or part of the capital gain from the sale from federal income tax. If you meet the requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly). Generally, you can exclude the gain only if you used the home as your principal residence for at least two out of the five years preceding the sale. In addition, you can generally use this exemption only once every two years. However, even if you don’t meet these tests, you may still be able to qualify for a reduced exclusion if you meet the relevant conditions.
- Consider structuring the sale of investment property as an installment sale in order to defer gains to later years.
- Maximize the tax benefits you derive from your second home by modifying your personal use of the property in accordance with applicable tax guidelines.
- Make the maximum deductible contribution to your IRA. Try to avoid premature IRA payouts to avoid the 10 percent early withdrawal penalty (unless you meet an exception). Contribute the full amount to a spousal IRA, if possible. If you meet all of the requirements, you may be able to deduct annual contributions of $5,500 to your traditional IRA and $5,500 to your spouse’s IRA. You may be able to contribute and deduct more if you’re at least age 50.
- Set up a retirement plan for yourself, if you are a self-employed taxpayer.
- Set up an IRA for each of your children who have earned income.
- Minimize the income tax on Social Security benefits by lowering your income below the applicable threshold.
- Make a charitable donation (cash or even old clothes) before the end of the year. Remember to keep all of your receipts from the recipient charity.
- Use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.
- Use a credit card to make contributions in order to ensure that they can be deducted in the current year.
Itemized miscellaneous and medical expenses
- Take advantage of the adoption tax credit for any qualified adoption expenses you paid. In 2014, you may be able to claim up to $13,190 (up from $12,970 in 2013) per eligible child (including children with special needs) as a tax credit. The credit begins to phase out once your modified AGI exceeds $197,880 (up from $194,580 in 2013), and it’s completely eliminated when your modified AGI reaches $237,880 (up from $234,580 in 2013).
- Maximize the use of itemized miscellaneous expenses and/or medical expenses by bunching such expenses in the same year, to the extent possible, in order to meet the threshold percentage of your AGI.
- Make sure that you have applied for Social Security numbers for all new dependents. Otherwise, the dependency exemption on your income tax return may be disallowed.
Tax Planning for Specific Types of Investments
Investment tax planning can help you maximize after-tax returns on your investments. Tax planning for specific types of investments helps you identify which types of investments are best suited to your unique situation. Because different types of investments produce income or gain that may be taxed differently, you need to know how specific investments attempt to earn money and how those earnings are taxed. You also need to know how to treat any gain or loss when you sell your investments.
How do investments earn money?
Your investments can earn money in two ways: (1) they may generate income (such as dividends, interest, or rent) and/or (2) they may appreciate in value and can potentially be sold at a profit.
How are investment earnings taxed?
Some investment earnings may be tax exempt. Some may be tax deferred. Other earnings may be classified as ordinary income, taxable at ordinary income tax rates. Finally, other earnings may be taxed at the more favorable long-term capital gains tax rates.
Tip: Long-term capital gains are generally taxed at capital gains tax rates of 0 percent for taxpayers in the 10 and 15 percent marginal tax rate brackets, 15 percent for taxpayers in the 25 to 35 percent marginal tax rate brackets, and 20 percent for taxpayers in the 39.6 percent marginal tax rate bracket.
Generally, long-term capital gains tax rates are more favorable than ordinary income tax rates. Currently, the highest ordinary income tax bracket is 39.6 percent, while the highest long-term capital gains tax rate (for most types of assets) is 20 percent. That’s a difference of 19.6 percent.
Tip: Qualified dividends received by an individual shareholder from a domestic corporation (or a qualified foreign corporation) are taxed at long-term capital gains tax rates.
How does this apply to specific investments?
Specific investments and investment vehicles within your portfolio can generate income and earnings that will be taxed in different ways. By looking at the tax ramifications of each, you can estimate the potential total after-tax return on your investments and reallocate assets, if appropriate.
Cash and cash alternatives
Cash and cash alternatives typically include (1) money market deposit accounts, (2) CDs and other term deposits, (3) money market mutual funds, and (4) U.S. Treasury bills. You may have these types of assets in your portfolio because they are liquid and are considered relatively low risk compared to other types of investment vehicles.
Caution: Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Though a money market fund attempts to maintain a $1 per share price, there is no guarantee it will always do so, and it is possible to lose money investing in a money market fund.
These types of investments generally earn regular interest income. Regular interest income is classified as ordinary income and is taxed at ordinary income tax rates in the year it is earned. You may receive such earnings in the form of a cash payment or a
credit to your account, or, in the case of a money market mutual fund, you may be able to reinvest the earnings directly back into the fund. These earnings will be reported to you on Form 1099-INT or Form 1099-DIV. You report such income on Schedule B. Investment expenses relating to the income (e.g., annual fees) may be taken as a miscellaneous itemized deduction, subject to the 2 percent limit (reported on Schedule A).
Some money market mutual funds may distribute earnings that represent qualified dividends from corporate stock that are eligible for long-term capital gains tax treatment. You may receive the earnings in the form of a cash payment or you may be able to reinvest the earnings directly back into the fund. Either way, you must report the income in the year it is earned. The fund should report any portion of earnings that represents qualified dividends.
Some earnings generated by money market securities may be tax exempt. Money market mutual funds should report the portion or earnings that is tax exempt.
Money market mutual funds may distribute capital gain earnings derived from the sale or exchange of securities within the fund. The fund must distribute these earnings to shareholders to the extent they are not offset by capital losses. You may receive the earnings in the form of a cash payment or you may be able to reinvest the earnings directly back into the fund. Either way, you must report the income on Schedule D (or directly on Form 1040 if you are reporting capital gain income from distributions only) in the year it is earned.
You may also realize a capital gain (or loss) if you sell or exchange your cash alternative investments. If the capital gain is short-term (the asset was held for one year or less), the income will be taxed at ordinary income tax rates. If the capital gain is long-term (the asset was held for more than one year), the income will be taxed at capital gains tax rates. You may offset capital losses against capital gains (you must follow the netting rules). If you have a net capital loss, you may deduct up to $3,000
($1,500 if married filing separately) from other income. You may carry forward any excess loss to future tax years until it is all used up (you must use up short-term losses first even if they are incurred after long-term losses). Expenses relating to the capital asset (e.g., commissions, sales fees) are added to the asset’s basis (cost).
You may have bonds in your portfolio because they generally carry less risk than stocks and/or because they generate regular income. There are many types of bonds including U.S. government securities, corporate bonds, municipal bonds, agency bonds, mortgage and asset-backed securities, and foreign government bonds. Bonds are debt instruments. They generally pay you regular earnings called dividends, which are really interest, and at maturity you receive the bond’s face value.
Some types of bonds generate dividends that are exempt from federal taxation, state taxation, or both, though some tax-exempt bond interest may be subject to the alternative minimum tax. Taxable bond interest will generally be reported to you on Form 1099-DIV.
Expenses relating to bonds are treated the same as expenses relating to cash and cash alternatives (see above). However, if you borrow the money to purchase taxable bonds, interest on the loan can only be deducted to the extent of taxable net investment income. And, if you borrow the money to purchase tax-exempt bonds, interest on the loan is not deductible.
Earnings from international bonds may also be subject to foreign taxes.
Bonds purchased at a discount or premium to face value
Bonds purchased at a discount from par (face) value from their original issuer are called original issue discount (OID) bonds. With OID bonds, you pay tax each year on a portion of the discount amount (which is amortized over the life of the bond). The tax basis of the bond increases over time by an amount equal to OID so that you are not taxed again upon the sale or exchange on the discount amount as a capital gain. OID for tax-exempt bonds is also tax-exempt.
Bonds that are purchased in the secondary market (not at their original issuance) at a discount from face value are purchased at a market discount. Market discount is treated differently than OID. The market discount is applied over the remaining maturity of the bond from the date of purchase and is apportioned as ordinary income and capital gain. Market discount is taxable even for tax-exempt bonds.
Caution: The rules regarding OID and market discount are complex. For more information, consult a tax advisor.
If you purchase a bond at a premium to face value (either at original issue or in the secondary market), the premium amount is amortized over the remaining term of the bond and reduces your tax basis when the bond is sold or redeemed.
Bonds: capital gains and losses
If you purchase a bond and hold it until it matures, redemption of the bond does not result in any tax consequences–the amount you receive is a return of capital.
Selling bonds before they mature may generate capital gains or losses (even for tax-exempt bonds). Capital gains and losses for bonds are treated the same as those for cash and cash alternatives (see above). However, bond swaps can be utilized to create capital losses to offset capital gains. And, as described above, if you purchased a bond at a discount from face value the discount may affect the calculation of your gain or loss.
You may have stocks in your portfolio for their growth potential. In general, any increase in the value of stock shares is not taxed until you sell your shares. However, some stocks may make distributions in the form of dividends. Stock dividends are taxable in the year you receive them. They may be treated as ordinary income or they may qualify as dividends eligible for long-term capital gains tax treatment, depending on a number of factors. Sales and exchanges of stock may generate capital gains or losses. The same rules that are explained above regarding capital gains and losses apply to stocks’ however, special rules apply to purchases of stock on margin, short sales, wash sales, and stock redemptions. The same rules that are explained above regarding expenses apply to stock.
International stocks may generate earnings that are subject to foreign taxes.
You may have mutual funds in your portfolio for diversification and professional management. Mutual funds may consist of stocks, bonds, or both. Thus, mutual funds may pay (1) interest and/or dividends taxed at ordinary income tax rates, (2) qualifying dividends taxed at long-term capital gains tax rates, and (3) net gains (but not losses) that result from the sale or exchange of securities within the fund. The sale or exchange of mutual funds shares may also generate capital gains or losses. Some mutual funds may generate tax-exempt earnings. Some mutual fund earnings may be subject to foreign taxes. The same rules that are explained above regarding expenses apply to mutual funds. Mutual funds are not guaranteed or insured by the FDIC or any government agency, and your shares may be worth more or less than you paid when you sell them.
Options, puts and calls
An option is the right to buy or sell stock. A call option is the right to buy from the writer of the option, at any time before a specified future date, a stated number of shares of stock at a specified price. Conversely, a put option is the right to sell to the writer, at any time before a specified future date, a stated number of shares at a specified price. The cost of purchasing calls or puts is not deductible, but rather it is a capital expenditure. If you sell the call or the put before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it. If the option expires unexercised, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date. If you exercise a call, the cost basis of the call is added to the basis of the stock you acquire through exercising the call. If you exercise a put, the amount realized on the sale of the underlying stock is reduced by the cost of the put when figuring your gain or loss.
Caution: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options.” Copies of this document may be obtained from your financial professional and are also available at http://www.theocc.com .
Any earnings produced by an annuity grow and compound tax free until withdrawn. Upon withdrawal, the portion classified as principal is not taxed since premium payments are made with after-tax dollars. The portion classified as earnings is taxed at ordinary income tax rates even if the earnings represent dividends from stock that would otherwise qualify for capital gains tax treatment. Premature distributions (distributions made prior to age 59½) incur an additional 10 percent penalty tax on the earnings.
Pass-through investments generally refer to investments in business enterprises that pass through to you a share of the tax items of the business. This means that you report, on your individual tax return, part of the business’s income, gains, losses, and deductions as your own tax items. Types of pass-through investments include interest in sole proprietorships, limited liability companies, partnerships, limited liability partnerships, S corporations, and real estate investment trusts (REITs). Income from pass-through investments may be classified as passive income if you do not actively participate in the business. Passive activity losses can only be used to offset passive activity income.
Postpone Income/Accelerate Deductions
What is postponing income/accelerating deductions?
Postponing income and accelerating deductions are two techniques commonly employed by taxpayers to minimize tax liability during the current year. These techniques are part of year-end tax planning. Your ability to utilize a deduction depends largely on when you incur the deductible expense. In many cases, you can control whether you incur an expense in the current tax year or in the next, thereby controlling the timing of your deduction. You may also have control over whether you receive some of your income in the current tax year or in the next tax year.
Deferring some of your income can affect your tax liability in two ways. First, if you lower your income sufficiently (so that you’re in a lower tax bracket), you will pay tax at a lower rate this year. Second, if your income is lower, it’s easier to meet the 2 percent floor required for taking certain deductions. Miscellaneous itemized deductions, for example, are allowed only to the extent that they exceed 2 percent of your adjusted gross income (AGI) when you total them.
Accelerating deductions into the present tax year also makes it easier to meet the 2 percent floor–you incur the expenses in the current tax year instead of incurring them in one or more future years.
Why might you wish to postpone income and accelerate deductions?
There are several reasons why you might wish to postpone your income and accelerate your deductions, not the least of which is to delay the payment of your tax liability for as long as possible. If you expect to be in a lower tax bracket next year (because of retirement, unemployment, an anticipated business reversal, or any other reason), you should consider postponing income this year and pay ing tax on it next year to lower your overall tax burden. If you’re in a higher tax bracket this year, you should also consider accelerating your deductions in order to use them this year. This may allow you to derive the greatest advantage from your deductions.
Social Security benefits
Do you receive Social Security benefits? If so, you might want to consider postponing some of your investment income and accelerat ing some of your deductions. This is because you will be taxed on a percentage of your Social Security benefits if your modified adjusted gross income (MAGI) plus 50 percent of your Social Security benefits exceeds a specified base amount. So, in some cases, timing income and deductions can affect how much of your Social Security benefits are subject to tax.
Change in marital status
You also may wish to postpone income and accelerate deductions if you expect to divorce . Your marital status for the entire year is determined as of December 31. If both you and your spouse have substantial income, you may potentially be subject to the so-called marriage penalty.
Additionally, if you expect to use head of household filing status in the following tax year instead of single, you may want to postpone income until next year (if possible) to take advantage of the lower tax rates that apply to head of household taxpayers.
How do you postpone income?
There are a number of ways to postpone or defer your receipt of income. These include the following.
Are you self-employed? If so, you can postpone income (assuming that, like most people, you’re a cash-basis taxpayer) by waiting to collect money owed to you. You can do this by sending out year-end bills late in December so that you won’t receive the payments until the following year.
Are you employed by someone else? If you can hold off on receiving some of your pay for a while, it might be possible to have your employer wait until early the following year before paying you some of your year-end wages.
Defer year-end bonuses
Are you one of those lucky employees who actually gets a year-end bonus? If so, your employer may be willing to postpone the bonus until early the following year. Your employer will generally still be able to deduct it for the current year as long as you receive it within two and one-half months after the end of the tax year.
Hold your incentive stock options
Are you luckier still in that your employer grants you qualified incentive stock options (ISOs)? If so, remember that you generally do not recognize any taxable income until you exercise the options and sell the stock. You can postpone income tax and any capital gains tax by holding on to the options and/or the stock as long as permitted.
Remember interest income
Don’t forget about your interest income. The interest on bank certificates and Treasury bills isn’t includable in your income until you receive it at maturity (if the instruments have a term of one year or less). Transferring funds from other types of interest-bearing accounts to these types of certificates may delay tax on the interest.
Maximize retirement plan contributions
Don’t forget to add to your retirement savings . If you contribute the maximum amount allowable to certain retirement plans (such as 401(k) plans, IRAs, SEPs, and Keogh plans), you may be able to reduce your AGI if you meet all applicable requirements.
Use like-kind exchanges
Do you have business or investment property? Usually, you can defer recognition of capital gain or loss if you trade business or investment property for other business or investment property of a ” like kind .” The gain will eventually be subject to income tax, but you can defer it for a while.
Ask for installment payments on sales
Are you planning to sell property any time soon? If you receive the payments in installments over the next few years instead of all at once, you may be able to defer recognition of some of the capital gain on the sale.
Set up individual/flexible spending accounts
If your employer allows you to set up an individual spending account (ISA) with pretax wages, you can pay in advance for eligible health-care and dependent care expenses. You are reimbursed from your account when you incur an eligible expense. It is up to you to decide how much money goes into the account (subject to certain limits) . However, any money not used by the plan’s deadline (either the end of the plan year or up to 2½ months after the end of the plan year) is forfeited.
Defer bad debt cancellation or reduction
Do you owe anyone money? If you have a debt reduced or canceled, it is generally taxable income to you to the extent that the debt exceeds the amount for which it’s settled. Look into having it canceled or reduced next year instead. Special rules apply to bankrupt and insolvent debtors.
Shift or transfer income
By actually shifting (not postponing) income to someone in a lower tax bracket, you may be able to lower your tax bite. For example, you could shift income to a child under the Uniform Gifts to Minors Act. However, beware of the kiddie tax , which applies to certain investment income earned by children.
How do you accelerate deductions?
There are a number of ways to accelerate deductions. These include the following strategies.
When your itemized deductions are less than (but generally close to) your standard deduction, you usually lose the benefit of your itemized deductions. However, if you plan carefully, you don’t have to lose out by having to choose between the standard deduction and itemized deductions. Bunching allows you to adjust the timing of your expenses so they’re high in one year (when you itemize) and low in the next (when you take the standard deduction).
You can bunch deductions by taking the following steps:
- Prepay January interest in December
- Appropriately time nonemergency visits to your dentist and doctor
- Prepay property tax due the following year
- Time charitable gifts for maximum benefit
|Medical (deductible portion)||$1,000||$500|
|State and local taxes||$1,500||$1,000|
In this scenario, if your filing status is single , you should itemize in 201 3 . That is because your itemized deductions ( $6,500 ) exceed your standard deduction for that year ( $6,100 ). In 201 4 , you should take your standard deduction ( $6,200 ) because it’s larger than the amount of your itemized deductions ($5,000 ).
|Filing Status||2013 Standard Deduction||2014 Standard Deduction|
|Married filing jointly||$12,200||$12,400|
|Married filing separately||$6,100||$6,200|
|Head of household||$8,950||$9,100|
By accelerating deductions from 201 4 to 201 3 , you may be able to take advantage of deductions that otherwise would have been lost.
Take the deduction the year you pay the expense
If you use the cash method of accounting, as most individuals do, you cannot claim a deduction until you pay the related expense. You should date your checks and mail them before January 1. Accrual method taxpayers may claim a deduction in the year in which they incur the obligation to pay.
Document your charitable contributions
A charitable pledge doesn’t suffice. You must actually give the money to a charity before you can deduct the contribution. Charitable gifts must be verifiable to be deductible. In such cases, the charity should give you written confirmation of your donation at the time you make the contribution. This confirmation must include a good faith estimate of the value of any goods or services you contributed.
If you donate appreciated property, you generally will receive a charitable contribution deduction for the full appreciated value of the property, and you will avoid paying capital gains tax.
Deduct bad debts
Does anyone owe you money? If you lent money to someone who isn’t planning to pay you back, you may deduct the bad debt in the year it became totally worthless. You must take steps to try to collect on the debt well before the year’s end, however. Your efforts are evidence of the debt’s worthlessness.
Deduct any mortgage points paid by the seller
Have you bought a home recently? If you bought a home and the seller paid the mortgage points for you, you may be able to deduct the points (in certain cases).
Rent your vacation home
Do you have a vacation home that’s empty much of the year? If you rent it out less than 15 days per year, the rental income you receive is tax free. In addition, you may deduct real estate taxes, mortgage interest, and casualty losses. You may not deduct expenses for maintenance and repairs.
If you rent the home for more than 14 days per year and meet certain other requirements, it may be possible for you to deduct more expenses, including those for maintenance and repair.
Prepay state and local income tax
When you prepay state and local income tax, you can generally accelerate deductions for these taxes.
Deduct investment expenses
You may deduct investment-related expenses such as office rent, investment counsel fees, legal and accounting fees, secretarial fees, and some travel expenses. Expenses are deductible if they are related to the buying, selling, or maintenance of your investments and they exceed 2 percent of your AGI.
Deduct investment interest
You may deduct interest on loans used for investment purposes only against net investment income. If you’ve passed this limit, you can absorb the excess deduction by selling appreciated property (discuss the tax consequences with a tax professional).
Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc. Armstrong Advisory Group and the Securities America companies are unaffiliated. Representatives of Securities America, Inc. do not provide legal or tax advice. Prepared by Broadrige Investor Communication Solutions, Inc. Copyright 2014. Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state.