Year-End Tax Planning Basics

Don’t pay any more in taxes than you have to! You don’t want to pay any more in tax than you have to. That means taking advantage of every strategy, deduction, and credit that you’re entitled to. However, the window of opportunity for many tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2014 tax year.

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Timing Is Everything

Consider any opportunities you have to defer income to 2015. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to put off paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2014. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or, you might consider making next year’s charitable contribution this year instead.

What if You’ll be in a Higher Tax Bracket in 2015?

If you know that you’ll be paying taxes at a higher rate in 2015 (say, for example, that an out-of-work spouse will be reentering the workforce in January), you might take the opposite tack. Consider whether it makes sense to try to accelerate income into 2014, and to postpone deductible expenses until 2015.

Factor in The AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2014, prepaying 2015 state and local taxes won’t help your 2014 tax situation, but could hurt your 2015 bottom line.

AMT Triggers: You’re more likely to be subject to the AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren’t used to buy, build, or improve your home, and the exercise of incentive stock options.

The Landscape Has Changed For Higher-Income Individuals

Most individuals will pay federal income taxes for 2014 based on the same federal income tax rate brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2013. The same goes for the maximum tax rate that generally applies to long-term capital gains and qualifying dividends (for those in the 10% or 15% marginal income tax brackets, a special 0% rate generally applies; for those in the 25%, 28%, 33%, and 35% brackets, a 15% maximum rate will generally apply).

Starting this year, however, a new 39.6% federal income tax rate applies if your taxable income exceeds $400,000 ($450,000 if married filing jointly, $225,000 if married filing separately, $425,000 if filing as head of household). If your income crosses that threshold, you’ll also be subject to a new 20% maximum tax rate on long-term capital gains and qualifying dividends.

You could see a difference even if your income doesn’t reach that level. That’s because, if your adjusted gross income (AGI) is more than $250,000 ($300,000 if married filing jointly, $150,000 if married filing separately, $275,000 if filing as head of household), your personal and dependency exemptions may be phased out this year, and your itemized deductions may be limited.

Two new Medicare taxes need to be accounted for this year as well. If your wages exceed $200,000 this year ($250,000 if married filing jointly or $125,000 if married filing separately), the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–is increased by 0.9%. Also, a new 3.8% Medicare contribution tax now generally applies to some or all of your net investment income if your modified adjusted gross income exceeds those dollar thresholds.

IRAs and Retirement Plans – A Key Part of Planning

Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2014 taxable income. Contributions you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2014, but qualified Roth distributions are completely free from federal income tax–making these retirement savings vehicles very appealing.

For 2014, you can contribute up to $17,500 to a 401(k) plan ($23,000 if you’re age 50 or older), and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if age 50 or older). The window to make 2014 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your 2014 federal income tax return to make 2014 IRA contributions.

Required Minimum Distributions: Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the required withdrawals by the date required–the end of the year for most individuals–or a 50% penalty tax applies.

Absent new legislation, 2014 will be the last year that you’ll be able to make qualified charitable contributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you’re 70½ or older. Such distributions may be excluded from income and count toward satisfying any RMDs you would otherwise have to receive from your IRA in 2014.

Big Changes To Note

Home Office Deduction Rules: Starting with the 2014 tax year, those who qualify to claim a home office deduction can elect to use a new simplified calculation method; under this optional method, instead of determining and allocating actual expenses, the square footage of the home office is simply multiplied by $5. There’s a cap of 300 square feet, so the maximum deduction under this method is $1,500. Not everyone can use the optional method, and there are some potential disadvantages, but for many the new simplified calculation method will be a welcome alternative.

Same-Sex Married Couples: Same-sex couples legally married in jurisdictions that recognize same-sex marriage will be treated as married for all federal income tax purposes, even if the couple lives in a state that does not recognize same-sex marriage. If this applies to you, and you’re legally married on the last day of the year, you’ll generally have to file your federal income tax return as a married couple–either married filing jointly, or married filing separately. This affects only your federal income tax return–make sure you understand your state’s income tax filing requirements.

More Health-Care Reform Changes Take Effect in 2015: Beginning in 2015, you’ll generally be required to have adequate health-care coverage or face a penalty tax (a number of exceptions apply). A new premium tax credit will also be available to qualifying individuals.

Expiring Provisions

A number of key provisions are scheduled to expire at the end of 2014 including:

  • Increased Internal Revenue Code (IRC) Section 179 expense limits and “bonus” depreciation provisions end.
  • The increased 100% exclusion of capital gain from the sale or exchange of qualified small business stock (provided certain requirements, including a five-year holding period, are met) will not apply to qualified small business stock issued and acquired after 2014.
  • The above-the-line deductions for qualified higher education expenses, and for up to $250 of out-of-pocket classroom expenses paid by education professionals, will not be available after the 2014 tax year.
  • If you itemize deductions, 2014 will be the last year you’ll be able to deduct state and local sales tax in lieu of state and local income tax.

When it comes to year-end tax planning, there’s always a lot to think about. A financial professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine if any year-end moves make sense for you.


Tax planning is an activity that is best pursued year-round. You can use the following list of activities and dates to help you better carry out your planning on a regular and ongoing basis. The dates below are the same each year unless the date falls on a weekend or holiday, in which case the due date is the following business day.

First Quarter

  • If you work for tips and earn more than $20 in tips during the month, report tips to your employer by the 10th of each month for the following month on form 4070.
  • Complete Form W-4 and adjust withholding if needed.
  • Pay fourth-quarter estimated tax voucher for the preceding tax year by January 15.
  • Evaluate before-tax contributions to retirement plans.
  • Evaluate voluntary after-tax contributions to retirement plans.
  • Apply for a Social Security number for any child who does not have one.
  • Make quarterly defined benefit Keogh contribution for preceding year by January 15.
  • If you claimed exemption from withholding last year, you must file a new W-4 form with your employer to claim the exemption for this year.

Second Quarter

  • Comply with minimum distribution rules for qualified plans by April 1 if you attained age 70½ in previous year.
  • File individual tax return (or an application for an extension of time to file) by April 15.
  • Pay first-quarter estimated tax, using the correct voucher, by April 15.
  • Make previous-year IRA contribution by April 15.
  • Make previous-year Keogh plan contribution by April 15 (unless you applied for an extension of time to file your tax return).
  • Make quarterly defined benefit Keogh contribution for the current year by April 15.
  • Pay second-quarter estimated tax voucher by June 15.

Third Quarter

  • Make quarterly defined benefit Keogh contribution for the current year by July 15.
  • File Form 5500 Annual Report of Employee Benefit Plan by July 31, if applicable.
  • If you applied for an extension of time to file your preceding year’s tax return, file the return or an additional extension request by August 15.
  • Pay third-quarter estimated tax voucher by September 15.

Fourth Quarter

  • If you got an extension of time to file later than August 15, you must file by October 15.
  • Make your quarterly defined benefit Keogh contribution for the current year by October 15.
  • Begin your year-end planning.
  • Evaluate the applicability of the AMT and other taxes.
  • Adjust withholding, if necessary.
  • Evaluate year-end capital transactions.
  • Establish a separate Keogh plan for self-employment income.
  • Comply with minimum distribution rules for qualified plans.

Throughout the Year

  • Evaluate your tax and financial strategy for receiving discretionary and mandatory retirement plan distributions.
  • Re-Evaluate your uses of debt.
  • Consider making gifts to children or other family members up to the annual gift tax exclusion of $12,000 per gift per donee per year.
  • Evaluate passive loss exposure and potential investment shifts.
  • If you have excess cash flow, consider how to invest those funds.
  • Optimize mix of interest expense items.
  • Consider making charitable contributions of property, instead of (or in addition to) giving cash.
  • Consider ways to fund your children’s education.
  • Evaluate your mix of portfolio and passive income.
  • Review prior gifts to children under age 14 and their incomes in order to minimize the amount of income that will be taxed at your rate.
  • Review the selection of your second residence and status of your vacation home.


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