Q. What can I do before the end of the year to reduce my taxes?
A. While there usually are no magic bullets, you should consider the following simple strategies before the end of 2014.
- Before the end of the year, inventory assets in your investment portfolio to determine which have lost value since they were purchased. Selling assets at a loss will generate capital losses that offset capital gains and up to $3000 of ordinary income. If you have unused capital losses carried over from prior years, sell property that has increased in value and use the carry over losses to shelter the gains from tax.
- December is a good time of year to make charitable donations. While cash donations are common, you can also donate clothing, unused vehicles, and even stock and mutual funds. If you donate appreciated stock or securities, you can deduct their fair market value as of the date of contribution, and you never have to pay tax on any gains. Make sure you retain documentation to prove both that you made the gift and its value.
- If you have family members in the 10% or 15% federal tax brackets, consider making a gift of appreciated stock or securities to them. Taxpayers in these lower tax brackets qualify for a 0% rate on long-term capital gains when they sell the asset.
- If possible, defer income until 2015. If you are self-employed, delay sending out invoices until late in 2014 so that you will not get paid until 2015. If you do not have any capital losses with which to shield capital gain income, consider postponing selling stock and securities until early 2015.
- You should also try to accelerate deductible expenditures. For example, if you will be itemizing deductions, consider paying your January mortgage payment and 2015 property taxes before year-end so that payments are deductible in 2014. Try to schedule and pay for medical procedures prior to the end of the year. If you own a business, consider making large deductible expenditures prior to the end of the year.
- Defer as much money as possible into your 401(k) or other retirement plan. Remember that you have until April 15, 2015 to make a deductible contribution to a traditional IRA for 2014.
Amy Drake is an associate practicing in the Tax Department.