Although 2014 is more than halfway over, there are still options for taxpayers looking to save on their tax bill.
1. Sell securities. The maximum tax rate for long-term capital gains is 15% (20% for those in the top two ordinary income tax brackets). Under recent legislature, you may have to pay a surtax of 3.8% on capital gains.
2. Harvest capital losses. You might be able to sell losing positions to offset realized gains, including short-term gains. If your losses exceed your gains, you also can use them to erase up to $3,000 of ordinary income in 2014.
3. Avoid the wash sale rule. The wash sale rule declares that “substantially identical” securities purchased within 30 days of selling an investment at a loss renders the loss nondeductible. This can be avoided by waiting at least 31 days to buy back the securities, or by purchasing the additional share, then waiting at least 31 days to sell your original holdings.
4. Arrange an installment sale. Some taxpayers may be able to defer tax on the sale of real estate or other property by receiving payments over the course of two years or longer. You could reduce the effective tax rate by staying below the thresholds for the higher capital gains rate and the 3.8% surtax. In addition, you will stretch out your tax payments.
5. Contribute to a 401(k). You can elect to defer as much as $17,500 to your account (or $23,000 if you’re age 50 or over). Those contributions will be taxed on withdrawal after compounding tax-free.
6. Sell your primary residence. You may exclude tax on up to $250,000 (for single filers) or $500,000 (for joint filers) of profit on a home sale, as long as you’ve owned and used the home as your principal residence at least two of the past five years.
7. Write off certain rental costs and depreciation. Be careful. If you personally use the property for more than the greater of 14 days or 10% of the days the home is rented out, then deductions are limited to the amount of rental income.
8. Claim your recently-graduated child as a dependent. Depending on your situation, you may be able to claim a $3,950 dependency exemption for a child graduating from college in 2014 if you’re providing more than half of the child’s annual support.
8. Contribute to a 529 plan. For a contribution between $14,000 and $70,000 for a beneficiary, you can elect to treat the contribution as though it were made over a five calendar-year period for gift tax purposes. Up to $70,000 in annual exclusions can shelter a larger contribution. The money (and the growth of your account) leaves your estate faster than if you made contributions each year.
9. Give a gift under the gift tax exclusion. You can provide up to $14,000 to any family member in 2014, without any gift tax consequences. Meanwhile, such gifts reduce the size of your taxable estate.
With a few strategic financial moves, you could see significant savings on your 2014 tax return.
This posting is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this posting should not be acted upon without specific professional guidance. Please call us if you have questions.