Tax Planning For 2014 The Benefits of Getting an Early Start
The other day I was having lunch with a friend. I have known Mark for years – since we were both in grade school, actually. As we were finishing up lunch, Mark invited me to a family outing he was about to attend. Unfortunately I had to decline, explaining that I was headed to my accountant in order to get a jump start on my taxes. To Mark, it seemed amazing that anyone would be concerned enough about their taxes to start on them in the middle of September.
Actually, the middle of September is a bit late for me this year. I had really wanted to see the accountant toward the end of August or early September, but he has been busy and we had scheduling difficulties. Nevertheless, I explained to Mark that I always try to begin my tax preparation and planning ahead of time, usually in September, so that everything is thoroughly handled and there are no major surprises.
This schedule has served me and my family well over the years, allowing us to make some very thoughtful and strategic moves ahead of time in many cases. I hoped that by the end of discussion, Mark will be more keen on starting his own tax planning ahead of time this year as well. After all, as you and I both know, there have been some key tax law changes this year.
Early Tax Planning
Most experts would advise you to really take a look at your tax situation around September. This will enable you to really understand your own situation and look at how new tax law changes will affect you while there is still time to react and organize things so you can minimize the taxes you will owe.
The first thing to do is know where you stand. Will you earn more more money this year than last? One of the best ways to go about getting a clear idea is to take out last year’s tax return and give a good line-by-line estimate of what things should look like this year. You should also consider what tax law changes have occurred during the past year (this is where the advice of a good financial planner or accountant can come in handy).
Do you have any specific issues that need to be addressed? For example, if you will be turning 70 ½ (or have already done so) this tax year, you must devise a strategy for taking a minimum IRA distribution.
You may also want to evaluate open enrollment options at work for health care plans, especially with Obamacare now being on the table. How about converting a traditional IRA into a Roth IRA, or doing the reverse? Have you maximized your contributions to your employer provided retirement plan? If not, you may want to look at ways to do so.
If you have a flexible health spending account with money still in it, consider ways to use it up (since normally you cannot take this with you). Do you have some poor performing investments that you might consider selling in order to have a tax loss to offset against other income and gains?
Things to Watch for Next Year
There have also been some important tax law changes that might affect you. As an example, high-income earners – couples earning more than $450,000 or singles earning more than $400,000 – will now be required to pay a higher 20 percent capital gains tax rate, according to CNBC. The top income tax rate has also jumped from 35 to 39.6 percent, and a 3.8 percent Medicare surtax has been established.
If your income threshold has changed, there may be other issues and concerns. More and more middle income earners are finding they are required to pay the alternative minimum tax, which is a parallel tax system with major implications. Or maybe your income changes will simply land you into a higher (or lower) tax bracket. Either way, it is certainly best to know and understand the full implications of your situation ahead of time.
There are also a number of new tax rules for estate planning, so you may want to take a closer look at these, especially if you are planning on leaving something to your heirs. You may want to consider gifting appreciated stocks to someone in a lower tax bracket. Of course, rules for the so-called “kiddie tax” have changed as well, CNBC reports. Once more, these are all great reasons to seek the advice of a tax planning professional.
There is clearly a lot to think about before you decide what moves to make. This is the biggest reason to start early. One decision can generally lead to a lot of others, and beginning in September can help to ensure that you have enough time to get everything in order.
Strategies for Income & Losses
If you expect to be in the same or a lower tax bracket next year, many tax planners may suggest you defer as much income as possible until after the end of the calendar year. Some ideas for this? You could try deferring year-end bonuses until January. You could also avoid exercising incentive stock options or postpone the receipt of IRA distributions – those that are above the minimum required, of course.
Another option is to consider accelerating deductions. You could prepay your mortgage interest (as long as this would still be considered deductible) or even real estate taxes and charitable contributions. If you are making any alimony or out-of-pocket medical payments that are still deductible, consider doing so before the end of the year.
If you have some assets that have lost money, consider selling these for their tax deduction. Almost any excess capital loss can be used to offset actual income, though keep in mind that there is a $3,000 yearly limit on this type of loss. Additionally, there are some cases where additional capital losses above this threshold may be carried over to the next year (for up to three years, in some cases).
On the other hand, if you think it is likely that you will be in a higher tax bracket next year, you should accelerate your income and defer deductions. These strategies can be quite technical, so consult with a qualified tax planning professional before trying any of these ideas on your own.
Bottom Line—Preparation is Key
As you can see, taxes are a bit complicated. Taking the time to do just a bit of planning now can ensure you do not pay Uncle Sam more than you need to. The best way to do this is by talking with a qualified financial planner. He or she can help you examine your situation and give specific advice about which strategies will benefit you the most.
By starting early (September or October), you will avoid the end of season rush that many financial planners experience, and you will have the time you need to put your strategies into place.
By Joseph Carducci 2013-09-26