With December 31st right around the corner, it still isn't too late to make financial decisions to minimize your tax bill. Individuals have many questions they can ask themselves about ways to save on their 2014 or future tax bills. One of the best ways to save on tax is by accelerating or deferring income and deductions.
Taxpayers may want to accelerate income or defer deductions if they expect that their current tax bracket is going to be lower than their future tax brackets. This could include having bonuses paid to you before year-end, accelerating IRA distributions, selling capital gain stocks or possibly converting a traditional IRA to a Roth IRA. These are all ways to increase current year taxable income if you expect that this year’s tax rate will be lower than the future years’ tax rates. Taxpayers who are not able to itemize their deductions in the current year may want to delay charitable contributions, mortgage payments, or state tax estimates until after January 1 in hopes that they will be able to itemize their deductions in the following year.
Most taxpayers, however, are concerned with lowering the tax bill in the current year, and there are several ways that this can be done with year-end planning. Some of the best methods include:
- Selling stocks that have lost value since date of purchase
- Increasing 401(k) or traditional IRA contributions
- Paying the 4th quarter state estimated tax payment in December
- Paying the January mortgage payment in December
- Making charitable contributions in December
These are just a few ways to effectively manage your individual tax liability. Almost all of the ideas are decisions that will be made anyway, but if timed properly can provide the greatest tax benefit.
William A. “Bo” Taber, III