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10 Year-End Income Tax Planning Tips

Even though the store aisles are already littered with holiday decorations, there is still time for you to minimize your 2014 income tax liability. As you likely experienced with your 2013 tax return, taxes have increased, and each year the rules become more complicated. Because of this, planning to keep your taxes to a minimum becomes that much more valuable. These 10 tax saving suggestions may help you keep more of what you earn.

Maximize Qualified Retirement Plan/401(k) Contributions

If you are not contributing the maximum amount to your retirement plan, we strongly encourage you to consider doing so. Not only does this go a long way towards meeting your retirement goals, but it could save you thousands in taxes. The 2014 401(k) deferral limit is $17,500. If you are age 50 or over by year’s end, you can contribute an additional $5,500 for a total of $23,000.

Utilize Pre-Tax Payroll Deductions

Some employers allow employees to participate in Section 125 or cafeteria plans. These plans allow employees to select from numerous benefits to be paid from their wages. Some plan benefits can be paid on a pre-tax basis including, health, dental, and vision insurance premiums, and dependent care benefits. Some employers also offer flex spending accounts or health reimbursement accounts. These plans allow physicians to pay for qualified medical expenses on a pre-tax basis, resulting in a potential savings of 40 percent or more.

Consider a Health Savings Account (HSA)

An HSA is a separate bank account used to pay for medical expenses. It must be coupled with a high-deductible health plan (HDHP). Contributions are made pre-tax or are tax-deductible up to certain limits. Funds grow tax-free in the account, and disbursements are tax-free when used for qualifying medical expenses.

Consider Residential Energy Efficient Improvements

For 2014, certain costs related to qualified solar electric, solar water heating, small wind energy, and geothermal heat pump property costs are eligible for a tax credit of 30 percent of the costs associated with the property. We have had numerous clients install geothermal heat pumps that qualify for the tax credit. This is a great way to cut your tax bill in the year of installation and your utility bills for years to come.

Tax Planning for Non-Employees

Practicing as a sole proprietor allows you to take advantage of several additional tax breaks. Some common strategies and deductions include the self-employed health insurance deduction, the home office deduction, employing family members, medical reimbursement plans, paying rent to related parties, and retirement plans. Each of these options has specific rules and requirements that must be followed. When structured properly, each option could save you substantial tax dollars.

Capital Gains/Losses Planning

The tax rate on long-term capital gains can be 0 percent, 15 percent, 20 percent, 25 percent, or 28 percent depending on your taxable income and the underlying asset sold. In addition, the gain could be subject to the additional 3.8 percent tax on net investment income. Because of this, proper tax planning is essential. In certain situations, harvesting losses by selling a security that has decreased in value, then purchasing the same security at least 31 days later can be beneficial.

Make Up a Tax Shortfall With Increased Withholdings

If you are in a situation where you will be subject to an underpayment penalty, consider making up the shortfall by increasing your tax withholdings between now and the end of 2014 instead of increasing your estimated tax payments. The withholdings are considered to be paid in evenly throughout the year, while estimated tax payments are factored into the calculation using the actual dates paid.

Utilize Your Annual Gift Tax Exclusion

For 2014, you can give up to $14,000 to as many people as you desire without gift or estate tax consequences. In addition, if you are married, you can combine gifts with your spouse to double the amount to $28,000 per person for 2014. You can utilize this exclusion each year to reduce your taxable estate. Also, it is possible to fund up to five years’ worth of annual gift tax exclusion amounts (currently $70,000) in one year into a 529 plan.

Think About Your Charitable Donations

Contributing appreciated stock (held one year or more) benefits you and the organization more than if you sell the stock and donate the cash proceeds net of the tax cost. The charitable deduction amount is determined using the fair market value, and the donor does not recognize the gain on the appreciation.

Utilize a Home Equity Loan

Interest on certain home equity loans or lines of credit can be tax deductible. Consider this if you need to finance significant purchases, such as a vehicle. For certain taxpayers, the alternative minimum tax (AMT) eliminates this deduction’s tax benefit.

L. Porter Roberts, Jr., CPA, and Matthew S. Smith, CPA, CFE, are with the Medical Services Group of Barr, Anderson & Roberts, PSC, in Lexington, KY. If you would like more information, they can be reached via email at and and via telephone at 859-268-1040.