With 2014 coming to a close, it’s as good a time as any to start preparing your annual tax return. And while tax season is nobody’s favorite time of the year, individuals and families can take steps to make tax filing a little less painful.
Here are some tips for year-end tax deductions that might save you a fortune in 2015.
1. Defer Your Income
The more income you earn, the greater your tax burden, right? While it’s true that you will need to eventually pay taxes on your earnings, you may be able to defer or postpone income taxes by a few months for a much-needed tax break.
As a freelancer or self-employed person, you can simply bill your clients a little later than usual, ensuring that payments aren’t received until January. While full-time employees will likely have trouble deferring salary payments, they may be able to request that year-end bonuses be delivered after the New Year to help them save. If you think you will be in a lower tax bracket next year, consider deferring some of your income to the following year to keep tax bills lower in 2014.
2. Bunch Itemized Deductions
As a taxpayer, you can choose to file either the preset standard deduction or itemized deductions that detail your specific expenses throughout the year. Because you can only deduct expenses that reach a particular percentage of your income, you may want to consider bunching itemized deductions to maximize your tax savings.
For example, if two members of the family require braces, you should consider paying for both orthodontics treatments in the same year. Doing this increases the percentage of your income that is going to medical expenses and helps ensure that you get the maximum tax deduction for the year. You may also be able to bunch charitable contributions, on-the-job expenses and costs associated with education.
3. Ditch Bad Investments
If you lost money in the stock market this year, you may assume that you have little cause to celebrate when tax season comes around. However, the truth is that capital losses can come in handy when you’re aiming to offset capital gains in your portfolio.
To minimize your taxable income, take the time to sell off bad investments and mutual funds before the taxman comes calling. Also known as “loss harvesting,” this strategy helps diminish the blow of a bad market experience by lowering the amount you owe to Uncle Sam. In fact, Americans who suffered more losses than gains may be able to reduce their taxable incomes by up to $3,000, with additional losses carrying over to future years. In some cases, you can even earn a refund to make up for some of the money that was lost.
4. Increase Retirement Savings
Looking to reduce your tax burden before April? Investing in your own retirement is a great way to diminish your taxable income while preserving the financial future of you and your family members.
Because you don’t have to pay taxes on your 401(k) savings until you withdraw funds, this type of account can grow rapidly over the years. As an added bonus, many employers match worker contributions up to a certain figure. According to the IRS, individuals can contribute up to $17,500 to their 401(k) accounts in 2014.
Additionally, individuals can lower their tax burdens by making contributions to traditional and Roth IRAs. Because they aren’t taxed like traditional savings accounts, IRAs allow you to accumulate money from interest, dividends and capital gains. Although you can make 2014 contributions through April of next year, paying into your IRA early gives your money more time to grow.
Invest in a tax-deferred retirement account now, and lower your tax liability while ensuring your golden years will be comfortable ones.
5. Give to Your Favorite Charity
The end of the year is a great time to donate to those who are less fortunate than yourself. However, you can also use the opportunity to reduce your overall tax burden.
If you don’t have a lot of expendable cash this holiday season, consider giving unneeded items like cars, furniture, and even stocks and mutual funds that you’ve held for less than one year. The charity will benefit from the cash influx while you enjoy a deduction equal to the stock’s value at the time of the donation.
As a caveat, you will need to make sure the charity in question is a qualified organization. Along with political contributions, those donations made to sports groups and employee associations are often ineligible for deduction. You can review the IRS’ list of organizations that are eligible to receive tax-deductible donations online.
Employing tax-smart strategies like the ones listed above can have a significant impact on your financial portfolio. Take the time to examine your options when it comes to tax filing, and lessen your burden when Uncle Sam calls for his share of your income.
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