2014 has been a prosperous year for taxpayers who own stock
and mutual funds outside of their retirement accounts. But come
April 2015, you'll probably have to share some of your
bull-market bounty with the IRS.
Smart tax planning now can help you reduce the taxes you'll
owe on your investment gains, and other types of income, too.
Review Your Portfolio
Allowing taxes to dictate your investment strategy is rarely a
good idea. But if you're already considering selling appreciated
securities or other assets, cutting them loose by year-end could
save you money.
If you're in the 15% tax bracket, you'll pay 0% on long-term
capital gains. In 2014, you're eligible for the 0% capital-gains
rate if your taxable income is $36,900 or less if you are single,
or $73,800 or less if you are married filing jointly.
Taxpayers in higher brackets should look for losses to offset
investment gains. Offsetting gains is particularly important to
taxpayers in the 39.6% tax bracket (income over $406,751 for
singles; $457,601 for married couples), because they face taxes
of up to 23.8% on dividends and long-term capital gains, not the
15% rate that applies to most investors.
Don't sell shares to lock in a loss with the intention of
buying them back right away. The IRS "wash sale" rule bars you
from claiming the loss if you buy the same or a "substantially
identical" investment within 30 days of the sale.
Beware End-of-Year Mutual Fund Purchases
Sometime in December, many funds pay out dividends and capital
gains that have built up during the year, and the payout goes to
investors who own shares on what's known as the ex-dividend date.
It might sound like a savvy move to buy just before that day so
you get a whole year's worth of income.
That's not how it works, though. Yes, you'd get the payout,
but at the time of the payout, the share price falls by exactly
the same amount. If you get $2 a share in dividends, for example,
the share price drops by two bucks. In effect, the fund is simply
refunding part of your purchase price.
But the IRS doesn't see it that way. You have to report the
payouts as income on your 2014 return--and pay taxes on
them--even if the money is automatically reinvested in extra
shares. (The tax threat does not apply to mutual funds held in
401(k) plans or other tax-deferred retirement accounts.)
Before you buy shares for a nonretirement account in December,
check the fund company's Web site to find out exactly when the
dividend will be paid.
Convert to a Roth
If you think your tax rate is going to rise sometime in the
future, converting to a Roth makes a lot of sense. Withdrawals
from traditional IRAs are taxed at your ordinary income tax rate,
while all withdrawals from Roths are tax-free and penalty-free as
long as you're at least 59½ and the converted account has been
open at least five years. You do have to pay taxes on any pretax
contributions and earnings in your traditional IRA for the year
Worried about not being able to pay the tax bill? Don't be.
When you convert to a Roth, you can change your mind. You have
until October 15, 2015, to undo the conversion and turn your Roth
back into a regular IRA.
Give to Charity
This is a great time of year to clean out your closets and
garage, but you can write off donations to a charitable
organization only if you itemize deductions. A few bags full of
gently used clothes and household items can add up to hundreds of
dollars in tax deductions, but valuing those donations can be
difficult. (Try Turbo Tax's
If you donate a used car worth more than $500 to charity, your
deduction will be limited to the amount the organization receives
when it sells it. But you may be able to claim a bigger deduction
based on the vehicle's fair-market value if the charity uses it
to deliver meals, for example, or gives it to a needy individual.
The charity will list the vehicle's sale price, or whether an
exception allowing a higher deduction applies, on Form 1098-C,
which you must attach to your tax return. Because of previous
abuses, donations of used cars and other noncash items may
attract extra scrutiny from the IRS. So keep scrupulous
Send cash donations to your favorite charity by December 31
and hang on to your canceled check or credit card receipt as
proof of your donation. If you contribute $250 or more, you'll
also need an acknowledgment from the charity.
Give Really Big to Charity
If you plan to make a significant gift to charity this year,
consider giving appreciated stocks or mutual fund shares that
you've owned for more than one year. Doing so boosts the savings
on your tax return. Your charitable-contribution deduction is the
fair-market value of the securities on the date of the gift, not
the amount you paid for the asset, and you never have to pay tax
on the profit.
If your favorite cause can't accept donations of appreciated
securities, consider opening a donor-advised fund instead. The
fund administrator will sell the securities for you and add the
proceeds to your account. You can deduct the value of the
securities on your 2014 tax return and decide later where you
want to donate the money.
A tax break that allowed individuals 70 ½ to make a tax-free
distribution of up to $100,000 from their IRAs directly to
charity expired on Dec. 31, 2013. Congress is expected to renew
it, but not until after the mid-term elections. The charitable
transfer lets you give the money to charity and count it as a
required minimum distribution but avoid taxes on the withdrawal.
Not including RMD in your adjusted gross income can also help you
stay under the income cutoffs for the Medicare Part B and Part D
high-income surcharge or taxable Social Security benefits. If
you're charitably inclined and have more money than you need in
your IRA, postpone taking RMDs for as long as possible. Just
don't wait too long, because the penalty for failing to take an
RMD by Dec. 31 is 50% of the amount you should have
Give to Your Family (or Other Lucky People)
You can give up to $14,000 to as many individuals as you like
before Dec. 31 without filing a gift-tax return. If you're
married, you and your spouse can give up to $28,000 per
The case for using the annual gift-tax exclusion for
transferring wealth to adult children (or other lucky recipients)
isn't as strong this year as it has been in the past. The
estate-tax exemption is now $5.34 million (and twice that for
married couples), indexed to inflation. Only a handful of
ultra-wealthy families need to worry about the estate tax at that
level. But 20 states and the District of Columbia impose some
type of estate or inheritance tax, and most come with much lower
exemptions. Rhode Island, for example, taxes estates valued at
more than $921,655 at a maximum rate of 16%.
If you're feeling really generous, you could do it all over
again on January 1, 2015, when you can give up to $14,000 per
Give the Gift of Securities
If your adult children or parents are in the 10% or 15% tax
bracket (taxable income of up to $36,900 for singles, $73,800 for
married couples), they qualify for the 0% tax rate on long-term
capital gains. When they sell the securities, profit that would
have been taxed at a rate as high as 23.8% on your return will be
tax-free on theirs. Children under 18 and full-time students
under age 24 are subject to the "kiddie" tax. Investment income
that exceeds $2,000 will be taxed at the parent's higher
To qualify for the special rate for capital gains, the
securities must have been held for at least 12 months. For
securities given as gifts, though, the holding period includes
the time you owned them.
This strategy requires finesse. When you sell stocks or funds,
your gains lift your taxable income. Sell too much and you could
push yourself out of the 15% tax bracket, which means you'll end
up paying taxes on some of your profits. To avoid taxes entirely,
you'll need to calculate the amount of gains you can reap before
your income exceeds the threshold. Note also that your state may
tax long-term gains that go tax-free at the federal level.
Feed Your 401(k)
Money you contribute to your 401(k) or similar employer-based
retirement plan plan (if it's not a Roth) is excluded from your
income, lowering your tax bill.
If you're not yet on track to max out your contributions by
year-end, you can direct some extra dollars to your retirement
plan during your last few pay periods--or, if you get a year-end
bonus, use it to fatten your savings.
This year, workers can contribute up to $17,500 to
employer-based plans, the same as in 2013. Workers 50 and older
can contribute up to $23,000.
Safeguard Your Refund (by Shrinking It)
When you file your tax return each year, the amount of tax
withheld from your paycheck or submitted through estimated
quarterly tax payments ideally should match the amount of tax you
owe. In reality, that seldom happens.
The majority of Americans are addicted to refunds. More than
75% of U.S. taxpayers give Uncle Sam an interest-free loan year
after year, with an average refund of about $3,000--that's $250
per month. Wouldn't you rather get your money when you earn it
instead of waiting a year for a refund? What's more, that fat
refund represents a security risk--identity thieves have been
filing fraudulent returns and stealing refunds.
There's an easy fix. Just file a revised Form W-4 with your
employer. The more "allowances" you claim on the W-4, the less
tax will be withheld.
If your current financial situation is similar to last year's,
just use our
Tax Withholding Calculator
. Answer three simple questions (you'll find the answers on your
2013 tax return), and we'll estimate how many additional
allowances you deserve -- and how much your take-home pay could
However, this tool won't be much help if your tax situation
has changed since last year because, for example, you got
married, had a baby or switched jobs. In that case, you might
want to give the more-complicated IRS online withholding
calculator a whirl.
Penalty-Proof Your Return
If you expect that you'll owe money when you file your 2014
tax return next spring, you can avoid an underpayment penalty by
boosting your withholding now.
You needn't pay every penny of the tax you expect to owe. As
long as you prepay 90% of this year's tax bill, you're off the
hook for the penalty. Or you can escape its reach, in most cases,
by prepaying 100% of last year's tax liability. However, note
that if your 2013 adjusted gross income topped $150,000, you'll
have to prepay 110% of last year's tax liability to avoid a
Taking these steps to boost your withholding at year-end will
shield you from an underpayment penalty on your 2014 return, no
matter how much you actually owe when you file your return.
If you have both wage and consulting income and expect to owe
money on your tax return, you'll do better by boosting the taxes
withheld from your last few paychecks rather than trying to make
up the shortfall with your final estimated quarterly payment, due
January 15, 2015.
Taxes that are withheld are treated as if they were spread out
evenly throughout the year, so that approach sidesteps an
underpayment penalty; the estimated-tax-payment approach does
Plan Your Itemized Deductions
If you expect your income to drop next year--you plan to
retire, for example--deductions will probably be more valuable
You may want to pay deductible expenses before year-end, such
as your January mortgage, 2015 real estate taxes and
fourth-quarter estimated state income taxes. Be careful, though:
If you're a candidate for the Alternative Minimum Tax, some of
those deductions could be disallowed.
On the other hand, if you expect your income to increase next
year, you'll want to defer charitable gifts and other deductible
expenses because they'll be more valuable.
Spend Down Your Flex Plan (if You Need to)
Last year, the Treasury Department and IRS changed the rules
so employers can allow people to carry over up to $500 in their
accounts from one year to the next. Companies can choose to make
this change, but they're not required to do it.
If your employer didn't make the change and doesn't offer a
it's time to clean out your flexible spending
. (You may also need to spend some money if you expect to end the
year with more than $500 in your account.) Remember that you can
no longer use flex funds to pay for over-the-counter medicines,
such as aspirin, ibuprofen or allergy meds, without a
prescription (except for insulin). But that restriction does not
apply to other nonprescription medical items, such as crutches,
contact-lens solution or bandages. (For a list of what is allowed
by law, see
IRS Publication 502
.) The same rules on eligible purchases apply to health savings
More from Kiplinger
Time Is Running Out on Energy-Efficient Home
Improvement Tax Credits
10 Least Tax-Friendly States in the U.S.
Another Reason to Fix Your Tax Withholding --
Quiz: Is It Deductible?
10 Most Tax-Friendly States in the U.S.
Tax Planning for Same-Sex Couples