6 tips for managing your year-end tax planning

The end of 2014 is shaping up to be relatively quiet compared to the challenges of recent years – such as the fiscal cliff. After this year’s mid-term elections a lame duck Congress needs to fund the operations of the federal government, so it is possible new tax law changes could affect current income tax and financial planning. For the time being, though, the current laws provide the guidelines of how taxpayers need to plan.  

Robert Fishbein, a vice president in the Tax Department for Prudential, offers some tips and caveats to keep in mind when filing your tax return this year. As a taxpayer, you can take steps now to:

1. Avoid withholding too little.

If you think you’re going to owe money when you file your return, consider increasing your tax withholding with your employer or paying 100 percent of what you owed in taxes last year – or 90 percent of what you estimate you owe this year – to the IRS now. In general, you’re not subject to penalties or interest if you make such payments.

2. Minimize taxes from capital gains.

One way to do this is to sell stocks or mutual funds at a loss to offset any capital gain that you have for the year.

If you’re married and your combined income is $ 73,800 or less – or if you’re single and your income is $ 36,900 or less – you are eligible for a federal zero percent long-term capital gains rate. If you qualify for this rate, you may want to take advantage and sell some stock in a gain position.

If your income is higher, consider other steps – such as making your January mortgage payment in December – to reduce your income and qualify for the zero percent federal rate on capital gains. Remember that you may still be subject to state income taxes.

3. Stay below the 3.8 percent investment income tax threshold.

The 3.8 percent tax on investment income became effective in 2013, with a threshold of $ 200,000 of adjusted gross income for individuals and $ 250,000 for joint filers.

Short term, you can manage your tax position to keep below the income threshold or minimize investment income in any year where you’ll exceed the threshold. Longer term, consider investment options that avoid the tax, such as tax-exempt bonds.

4. Consider converting retirement assets to a Roth IRA.

Even with tax rates remaining the same or rising, converting traditional IRA assets to Roth IRA assets may still be wise. For one thing, having Roth IRA assets diversifies your retirement assets from a tax perspective. Roth assets allow you to better manage your tax position annually in retirement, and limit the impact of Medicare surcharges and the 3.8 percent investment tax.

Remember, if you wait to convert until January 2015, your tax liability will not be due until you file your return in 2016, giving the Roth assets time to grow tax-free.

5. Contribute to an IRA.

You may contribute to an IRA annually as long as your earned income is at least the amount contributed and you’re not yet 70 1/2.

Income limits apply only to determine if the contribution is deductible from income. Don’t be confused into thinking you’re not eligible. To be clear, every individual with earned income and who has not reached age 70 1/2 can contribute to an IRA. But it may be on an after-tax basis. Still, the earnings are tax-deferred. This can be a powerful way to add to retirement savings on a tax-favored basis.

Funding a traditional IRA also offers an indirect path to funding a Roth IRA for those who earn too much and cannot fund the Roth directly. Once you fund a traditional IRA you can immediately convert it to a Roth. There are no income limits that apply to Roth conversions, and assuming this is your only IRA, there should be little or no income tax due upon conversion because there should be little or no gain on the assets.

Regardless of whether you fund a traditional or Roth IRA, consider making your 2014 contribution now rather than waiting for the April 15, 2015 deadline. Also, consider making your 2015 contribution in January. By accelerating the contributions, you will allow more time for these investments to grow on a tax-deferred or tax-free basis.

6. Make charitable contributions using IRA funds.

The special provision to exclude from income certain IRA funds used for charitable contributions expired at the end of 2013. However, Congress may reinstate the provision this year or early next. So you should adhere to the old provision to be eligible for the reinstated version. For example, pay IRA funds directly to the charity and limit the contribution to under $ 100,000. There’s no guarantee you’ll qualify under a reinstated provision, but not observing the formalities will almost certainly mean you’ll be ineligible.

Of course, because individual circumstances are unique, it’s always a good idea to consult with your tax and legal advisors before making any tax-related decisions.


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