4 Ways to Reduce Your 2014 Taxes

Few things are as painful as filing your tax return in the spring and realizing you owe the government even more money.  Fortunately, the 2014 tax year is not over yet and there are some ways you can potentially reduce your tax bill.  Here are some ideas to lessen the tax bite:

1.  Make a traditional IRA contribution.  You can make a traditional IRA contribution all the way up to April 15^th 2015 and still have it count for the 2014 tax year. Those under age 50 can contribute up to $5,500/year and if you’re over age 50 you can contribute an additional $1,000/year for a total of $6,500/year.  The contribution will be tax deductible as long as your AGI (adjusted gross income) is below the limit. 

Here is a nice recap of the 2014 AGI limits*:  http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/traditional_ira/contribution_limits

Example: You make a $5,500 traditional IRA contribution and you fall in the 25% Federal tax bracket.

$5,500 X .25 = $1,375 in tax savings

The tax savings may be even greater since a deductible traditional IRA contribution will reduce your AGI, which may potentially affect other tax credits and deductions.  Also, this example doesn’t even include the potential state income tax savings.  I once advised a couple to make full traditional IRA contributions and they reduced their tax bill by over $3,800!

*Source: Charles Schwab & Co.

2.  Make a donation to charity.  If you itemize your deductions, you can claim donations to a qualified charity as a tax write off.  You can donate cash, used goods, clothing and your car. 

For those in high tax brackets with investments in a taxable brokerage account you can even donate shares of mutual funds/stocks and avoid paying taxes on the capital gains!  This can be substantially better than giving cash in many instances. 

If you aren’t sure which charity you want to give money to or when you want to donate but would like the tax deduction immediately you could set up a Donor Advised Fund (DAF).  This helps separate the time of the tax deduction from the time of the gift.

Make sure to keep receipts, records and appraisals so you can prove the donations if the IRS ever audits you.

3.  Capitalize on any tax losses you have.  If you bought a stock or mutual fund through a taxable brokerage account and the value of the investment has declined it may be worthwhile selling the security to be able to write off the loss.  The loss will offset any other capital gains you have potentially saving you 15% or more.  If you don’t have any gains to offset, up to $3,000/year can be used to offset ordinary income which can yield even higher tax savings.

Example: You buy XYZ stock for $10,000 and it declines to $6,000.  You sell it for a $4,000 loss.  You have $2,000 of capital gains from other stock transactions and you are in the 25% Federal tax bracket.

$4,000 loss offsets the $2,000 gain.  The remaining $2,000 of losses offset your ordinary income.  Tax savings:

$2,000 of offset capital gains x .15 (long-term capital gains tax rate) = $300  

$2,000 of offset ordinary income x .25 (Federal tax rate) = $500  

$800 in taxes saved/avoided.

If you still think the stock is worth owning you can simply buy it back as long as you wait 30 days to avoid the wash sale rules.  Here is a nice recap of the wash sale rules*:

http://www.investopedia.com/terms/w/washsalerule.asp

*Source: Investopedia

Best of all, if you have substantial capital losses over and above offsetting $3,000 of ordinary income, the losses carry forward to future tax years so they aren’t wasted.

4.  Make a contribution to a 529 plan for your child.  Many states offer a tax break for contributions to a college savings 529 plan.  A 529 plan allows contributions to grow tax-deferred and if the money is used towards qualified college expenses there are no taxes owed on the earnings.  In New York a married couple can deduct up to $10,000/year of 529 contributions which may save them approximately $650 in state taxes.  This type of account is a great way to save for your child’s college costs. 

This website provides a great recap of which states allow tax breaks for contributions*:

http://www.savingforcollege.com/529_plan_details/ 

*Source: Savingforcollege.com