As we enter the home stretch of 2014, it’s time to consider some tax moves. Here are a few you might want to consider:
1. G ive to charity. For those who itemize, making a charitable contribution could lower your taxes. Rather than just giving cash, consider giving your most highly appreciated securities. You usually will get a deduction equal to the full value of the securities and will not have to pay a capital gains tax.
2. Max out your 401(k). Those over 50 can contribute up to $23,000 to their company retirement savings account. That will lower your taxes. Though you will pay taxes when you withdraw the funds later, the hope is that your tax bracket will be lower in retirement.
3. Consider a Roth conversion. You can take a portion of your pre-tax traditional IRA and convert it to a post-tax Roth IRA. Sure, you’ll have to pay taxes when you do, but the future growth is tax-free, under current law. This is something you should consider if your marginal tax rate now is low and likely to go up in the future, such as when you take Social Security. If the tax bite is more than you thought, you can reverse the conversion next year at any time before you file your taxes.
4. Make sure you’ve taken the annual required minimum distribution (RMD). You must withdraw funds from your traditional 401(k) or IRA by April 1 following the year in which you reach age 70½. Failure to do so results in a 50 percent penalty.
4. Sell your losers. Have some investments that haven’t panned out? Consider selling and taking the tax loss. You can use the loss to offset gains or take up to a $3,000 loss per year and carry over the remainder to future years. This is known as tax-loss harvesting. Be sure you don’t buy the same security back until waiting 31 days or the IRS will disallow the loss.
5. Sell your winners. Don’t be confused that this strategy is the opposite of the previous move because, if you are in the 15 percent marginal tax bracket, your long-term capital gains may be taxed at zero percent. When it comes to taxes, zero is my hero.
6. Ditch the active mutual funds. Mutual funds that buy and sell stocks frequently pass on those gains to shareholders, even if the shareholder doesn’t sell a penny of the fund itself. Instead, consider broad index funds that can own every company and rarely pass on capital gains.
7. Watch out for the alternative minimum tax (AMT). Originally targeting high-income earners, the dreaded AMT now affects many ordinary people. There is no shortcut to either seeing your tax accountant or running an estimated return on a tax program to see if you may be hit. If you are among those affected by the AMT, there may be some things you can do this year to minimize its impact. Unfortunately, these could include not doing some of the items above.
Taxes are very complex. These are eight strategies to consider, but be very careful. Your individual circumstances dictate which of these may work for you, and which won’t. Finally, never forget that netting more after taxes is a far superior goal than paying less taxes.
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