Individual Tax Planning
Featured in the Northwest Herald
December 1, 2014
As another year draws to a close, there may still be opportunities to reduce your 2014 taxes. Tax planning can be beneficial regardless of your income level or the complexity of your taxes. A few simple steps can do much to reduce your tax bill, or increase your refund on April 15.
Maximize retirement contributions
One of the most effective methods to reduce taxable income is to maximize retirement contributions. If you participate in a 401k plan through your employer, you may defer a maximum of $17,500 ($23,000 if you are over age 50) to your 401k plan for 2014. You may have signed a document indicating that a certain percentage of each paycheck will be withdrawn for 401k contributions each paycheck, however, employers will often allow employees to modify this percentage. This can be a particularly effective option if you will receive a year end bonus. You may also be eligible to contribute to a traditional or Roth IRA account. The maximum contribution for 2014 for IRA accounts is $5,500 ($6,500 if you are over age 50). Keep in mind that you may not be eligible to make an IRA contribution if you participate in a workplace retirement plan, and your income is too high. IRA contributions may be made for 2014 retroactively through April 15, so consult with your tax accountant to see if an IRA contribution would be advantageous for you. Individuals with adjusted gross income of less than $30,000 may be eligible for a credit of up to $1,000, and married couples with adjusted gross income of less than $60,000 may be eligible for a credit of up to $2,000 on their tax returns for making retirement plan contributions in addition to the normal tax savings.
Additional Planning Opportunities
- If you have an eligible high deductible health plan, make additional contributions to a Health Savings Account before year end. For 2014, individuals with an eligible high deductible health plan may contribute up to $3,300 ($6,550 for family coverage) into a Health Savings Account.
- Make charitable contributions to eligible charitable organizations before year end if you itemize your deductions.
- Consider using a credit card to pay deductible expenses (such as charitable contributions) before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you have been unemployed, or your income is down for any reason in 2014, consider converting assets in a traditional IRA to a Roth IRA. This does increase your taxable income for the year, but if your income is minimal, you may be able to pay little tax to transfer your retirement funds to a tax free Roth account.
- Consider making contributions to an Illinois Bright Start or Illinois Bright education savings account. If you live in Illinois, contributions to a Bright Start account for anyone are tax deductible up to a total of $10,000 per year ($20,000 for married filing joint), and you pay no tax on earnings and withdrawals that cover qualified education expenses.
- If you have had a large gain from security sales in 2014, consider selling other security holdings at a loss to offset gains. You can sell the original holding, and then buy back the same security 31 days later to take advantage of the tax loss.
- You can exclude certain gifts up to $14,000 per recipient each year ($28,000 per recipient if your spouse elects to split the gift with you) without depleting any of your gift tax exemption. Consider making gifts to reduce your taxable estate.
- If you think you will still owe taxes, consider having your employer increase your federal and state withholdings on your remaining paychecks. The withheld tax will be applied pro rata over the full 2014 tax year to reduce penalties on underpayments of estimated tax.
Tax planning is never a ‘one size fits all’ approach. A strategy that works well for one person may not work for another. Contact a tax advisor to help determine a tax strategy for you.
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