Turning Uncle Sam into Santa Claus

uncle sam santa clausWe hope everyone had a great Thanksgiving holiday. We certainly did. Now starts the final countdown for 2014. Only twenty-some days to Christmas, and less than 30 days left before 2015 arrives. Hard to believe. Certainly, most everyone’s calendar is packed full for the next four weeks. We just wanted to make sure that tax planning is on your list of “must do” items before year-end. Of course, tax planning doesn’t rank in the same category as giving my mother a Christmas kiss, being with my family or watching Dickens’ “A Christmas Carol” for the fiftieth time, but it is important.

Two good reasons: none of us likes surprises and most everyone wants to take advantage of every legal way to reduce taxes. By reviewing your taxes before year-end (hopefully with your CPA), you not only see roughly where you are for the year, but also learn what you might be able to do before year-end to reduce Uncle Sam’s share of your income.

Congress is making it tough on all of us this year. They have delayed action on more than 50 business and individual tax breaks that expired on December 31, 2013. These so-called “tax extenders” include provisions that allow businesses to write off the cost of substantial equipment at a faster rate, tax credits to weatherize homes and some higher education expenses to be deducted.

The tax extenders have commonly been renewed each year, often right after elections or even retroactively at the beginning of the next year. As we go to press, the jury is still out on renewal. Even so, there are some tax breaks you should consider for 2014:

  • Consider upping your charitable contributions. This could be writing a few more or larger checks and/or giving non-cash items, like clothing, furniture and even an old car.
  • Consider giving appreciated stock to charity this year. You get a deduction for the value of the stock given, not the cost. And, you don’t pay capital gain taxes on the money if you have held the security for 12 months. If you aren’t sure of the charity you want to give the funds, you can make the gift to a donor-advised fund, such as Schwab’s, which allows you to get a deduction this year and then advise on the recipient next year.
  • Consider gifts to your family. No, there is no tax deduction for gifts. But, you can give up to $14,000 ($28,000 if you are married) to as many individuals as you like before December 31 without anyone incurring any tax. And, if you would like to, you can do it all over again on January 1, 2015.
  • Consider harvesting tax losses within your portfolio. DWM clients know that we already did this for our clients last month. It was tough again this year, as most positions for our clients are showing unrealized gains. Furthermore, remember that you can’t sell a loss position and buy it back within 30 days. That’s a “wash sale” and the IRS bars you from claiming this loss.
  • Consider paying certain items before year-end. These could include items such as real estate taxes, state income taxes, college costs, and mortgage payments.
  • Consider funding your IRA or Roth early. Yes, you have until April 15th to make the contribution for 2014, but why not get it working for you as early as possible. And, consider making 2015 contributions in early 2015.
  • Consider a Roth conversion for part of your IRA funds. Pay the tax once and allow the funds to grow tax-free forever; for your lifetime and that of your descendants. Furthermore, there are no required minimum distributions from Roth accounts starting at age 70 ½. You and your tax adviser will need to look at current and expected future tax rates to determine if this makes sense for you.
  • Check your withholding. Compare your estimated taxes to how much you have withheld. If you are way under, consider taking extra withholding in your final paychecks. And, if you are way under or way over, consider revising your withholding allowances for 2015.

So, between all the holiday festivities in December, you’ve got some homework to do. Get with your CPA and review your 2014 taxes and see if you can lower them. Let’s try to make Uncle Sam start to look like Santa Claus. Cheers!