Although there are very few days remaining in the year, you still have time to reduce your 2014 tax bill. The following are a few actions you can still
Contribute the Maximum to Your Retirement Accounts
Are you eligible for your company plan? The maximum allowed by law is $17,500 or $23,000 if you are 50 or over. If you contribute pre-tax dollars, you reduce your current-year taxable income.
Are you eligible for an IRA? You can contribute a maximum of $5,500 to an IRA plus an extra $1,000 if you are 50 or over. A traditional IRA reduces taxes for the current year ( although you are taxed at the time of withdrawal ) . A ROTH IRA does not reduce your current-year tax, but has many other advantages that are worth considering. You cannot contribute the maximum into both types of IRAs. The maximum amount can be split between IRA types. You do have until April 15, 2015 to make contributions to your 2014 accounts.
Are you are self-employed? Consider making the maximum contribution to your Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), or 401(k). You may have until April 15, 2015 or, if you file an extension, until October 15, 2015 to make contributions to your account. You contribution limits could be higher than IRAs depending on your business income for the year.
Take Any Required Minimum IRA distributions
You must start taking regular minimum distributions from your traditional IRA by April 1 following the year in which you reach age 70 ½. Failure to do so can result in a 50 percent excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. After the first year, annual withdrawals must be made by December 31 to avoid a penalty. Consider withholding tax from the payment when you take your withdrawals. NOTE: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts.
Convert all or part of a Traditional IRA to a ROTH
Although this would INCREASE your tax bill, another consideration is whether to convert to a Roth IRA. If you expect your tax rate to increase in the future - either because of rising earnings or a change in tax laws - converting to a Roth may make sense, especially if you still have a number of years until retirement. You will have to pay taxes on any pre-tax contributions and earnings for the year you convert, but withdrawals from a Roth IRA are federally tax free as long as you're at least 59½ and the converted account has been open at least five years. The conversion will not trigger the 10% penalty for early withdrawals and can be made anytime during the tax year.
Take Some Last-Minute Tax Deductions
If you itemize your deductions ( rather than taking the standard deduction of $6,200 for individuals and $12,400 if you are married filing jointly ), you may want to consider actions you can take to get additional deductions. For example, making a charitable contribution is a great deduction. You can donate appreciated stock or property that you have held over a year to get a double tax benefit. Remember to get a receipt!
Timing can be helpful also. Many of the itemized deductions are reduced by your income such as medical expenses or reimbursed employee expenses. Consider bunching as many of these expenses into one year as possible. For example, if you have larger than normal medical expenses in the year, consider some of those expenses that either can be accelerated or delayed, such as new eyes glasses.
To Reduce Capital Gains, Consider Selling Losing Investments
If you have large capital gains for the year, you may want to consider "Loss Harvesting." This strategy involves selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar. This can also help you to avoid the Net Investment Income Tax.
If your losses are more than your gains, you can use up to $3,000 of excess loss to offset other income. If you have more than $3,000 in excess loss, it can be carried over to the next year. It will then be used to offset any 2015 income. You can carry over losses year after year for as long as you live.
Review Your Flexible Spending Accounts
Many companies offer a Flexible Spending Account (FSA) to allow employees to move part of their pay into a special account that can be used to pay child care or medical bills. The main advantage of a FSA is that your contributions are pre-tax so you avoid both income and Social Security taxes. With the end of the year approaching, however, it is important to review your account balances. If you don't use all the funds by the end of the year, you may forfeit the excess. Ask your employer if it has adopted the grace period, which allows employees to spend 2014 funds as late as March 15, 2015. There may also be a provision whereby unused current year funds roll into your new-year account. If not, you may be making a last-minute trip to the drug store, dentist or doctor to use up the funds in your account.