Year-End Tax Planning

Tax preparation

As the end of the year approaches, you can probably get a rough idea of how much you’ll owe in taxes next April. It’s a good time to think about steps you can take to reduce those taxes.

Most year-end tax planning focuses on the timing and methods by which you report your income and claim your deductions and credits. Simply put, you should time your recognition of income so that it will be taxed at the lowest possible rate, and pay deductible expenses in years when you’d otherwise be in a higher tax bracket. Use these rules of thumb as a baseline strategy when making tax decisions regarding your filing status, family tax matters and business or investment arrangements.

“Year-end tax planning is just smart financial management,” says Portfolio Manager Mark W. Matejka of Landmark Bank Wealth Management. “Your forethought could provide substantial savings.”

Filing status and exemption tips

  • If you’re married—or will be married by the end of the year—you should review your tax bills based on all filing statuses that you might select. Compare what the results of filing jointly would be to that of filing separately. While you receive several tax deductions and credits by filing jointly that you don’t when you file separately, other deductions may apply to you only if you report your incomes separately.
  • Determine whether you’re entitled to claim a dependency exemption for a parent or other relative. To qualify, you must contribute more than half of that individual’s support during the year. Other conditions also may apply.
  • If you’re claiming a dependency exemption for a child who is 19 years old or up—or age 24 and up if your child is a full-time student—make sure that the child’s gross income doesn’t exceed $3,950.
  • If you and several other people financially support someone but none of you individually qualifies to claim that person as a dependent, you should consider making an agreement with all of the involved parties to ensure that at least one of you can claim the individual as a dependent on your taxes.

Family and personal giving tax tips

  • Determine whether you can shift income to family members who are in lower tax brackets in order to minimize your overall taxes. But be aware of the so-called “kiddie tax” if you’re considering shifting some income to a young recipient. The kiddie tax applies the parent’s tax rate to unearned income above $2,000 if the child is under 18, or to 18-year-old children whose earned income doesn’t exceed one-half of their support. Kiddie taxes also apply to those between the ages of 19 and 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
  • You can give gifts of up to $14,000 per person without paying the federal gift tax, under the annual gift tax exclusion. Maximize your savings by using assets that are likely to appreciate significantly if your gift goes to someone in a lower tax bracket, since any gains will be taxed at a lower rate. This tax-saving tactic also may counter a common tendency to bestow monetary gifts after a family member’s real need has passed, Landmark Bank’s Matejka points out.

“We see clients inherit money quite often when they no longer need financial help,” Matejka notes. “A little help earlier in life can often times be better than a lot of help later on.”

  • Take advantage of tax credits for higher education costs if you meet the eligibility requirements. Two education credits available are the American Opportunity Tax Credit and the Lifetime Learning Credit, which you can claim for tuition, fees and other related education expenses. Keep in mind that these credits are based on the tax year rather than the academic year—so you should try to bunch expenses to maximize the education credits.
  • If you have qualified student loans, you may be able to deduct up to $2,500 of the interest you paid on them during the year.

Real estate tax strategies

  • Your January mortgage payment includes interest due from the month of December. So make your January mortgage payment—that is, a payment due no later than January 15 of next year—in December so you’re able to deduct your interest for the final month of the year from your tax bill.
  • If you want to sell your principal residence, make sure you qualify to exclude all or part of the capital gain you’ll receive from the sale from federal income tax. If you meet the requirements, you can exclude up to $250,000, or $500,000 for married couples filing jointly. Generally, you can exclude the gain only if you used the home as your principal residence for at least two out of the five years preceding the sale. In addition, you can generally use this exemption only once every two years. However, even if you don’t meet these tests, you may still be able to qualify for a reduced exclusion if you meet certain conditions.
  • Consider structuring the sale of investment property as an installment sale in order to defer gains to later years.
  • Maximize the tax benefits you derive from your second home by modifying your use of the property to meet either mortgage or rental tax deduction guidelines.

Charitable donations that produce tax benefits

  • Make a charitable donation—which can run the gamut from a credit card donation to used clothing or household items in good condition—by Dec. 31 to deduct your contribution from your tax bill.
    Remember to double check that the charity to which you’re contributing is eligible to receive tax-deductible contributions before making your donation. You can’t deduct gifts to individuals, political organizations or candidates, the Internal Revenue Service cautions. Also, remember to ask for and keep all of your receipts for the donations.
  • It’s a good idea to use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.
    “Always give money to individuals and appreciated stock to charities,” advises Nick Thurwanger, Landmark Bank chief investment officer. “By giving appreciated stock to a charity, you never have to pay taxes on the gain and the charity receives the full benefit of the current stock price.”

Medical expense tax strategies

  • Make sure that you have applied for Social Security numbers for all new dependents. Otherwise, the dependency exemption on your income tax return may be disallowed.
  • Take advantage of the adoption tax credit for any qualified adoption expenses you paid. In 2014, you may be able to claim up to $13,190 per eligible child, including children with special needs, as a tax credit. The credit begins to phase out once your modified adjusted gross income (AGI) exceeds $197,880, and it’s completely eliminated when your modified AGI reaches $237,880.
  • Maximize the use of itemized medical expenses by bunching them in to the same year, to the extent possible. That way, you’re more likely to meet the 10 percent threshold percentage of your AGI beyond which you’re permitted to deduct unreimbursed medical and dental expenses you paid for yourself, your spouse and your dependents.

 Business and investment tax matters

  • Increase your employer’s withholding of state and federal taxes to help you avoid exposure to estimated tax underpayment penalties.
  • As an employee, you can deduct your business expenses as long as those expenses add up to more than 2 percent of your AGI. So try to bunch as many of your business expenses as possible into the current year to maximize your deductions.

Self-employment tax strategies

  • If you’re self-employed, you can defer income by holding off on billing clients until next year. You also may be able to defer a bonus.
  • Use installment sale agreements to spread out any potential capital gains among future taxable periods so you’re still eligible for the tax credits you ordinarily claim
  • Accelerate expenses, such as repair work or the purchase of supplies and equipment, to the current year to lower your tax bill.
  • There’s a simpler way to figure your home office deduction that might save you some time. Rather than completing a complex calculation of a number of expenses, you can take a standard deduction of $5 per square foot—up to a maximum of 300 square feet—for your home office space.
  • Make sure you meet the required threshold percentages of your AGI to deduct various expenses by “bunching” miscellaneous expenses into the same year.
  • If you have significant business losses this year, it may be possible for you to retroactively apply them to the prior year’s returns to receive a net operating loss carryback refund. If you had significant income in prior years, you should maximize the current year’s losses by deferring income if possible.
    Similarly, you can apply current operating losses to a future year’s profits to reduce taxes. “The use of tax loss carryforwards can save clients thousands of dollars in future tax payments,” Matejka says.
  • In certain circumstances, it may be possible to deduct the full cost of a qualifying equipment purchase the year you buy it by taking advantage of Section 179 in the tax code.

 Financial investment tax implications

  • Pay attention to the changes in the capital gains tax rates for individuals, and try to sell only assets that you have held for more than 12 months.
  • Consider selling stock if you have capital losses this year that you need to offset with capital gain income.
  • If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain. As Matejka points out, “You must take advantage of bad markets to rebalance and reallocate investment portfolios.”

Retirement contribution tax tactics

  • Make the maximum deductible contribution to your individual retirement account (IRA). Try to avoid premature IRA payouts so you don’t get hit with the 10 percent early withdrawal penalty that applies unless you meet an exception. Assuming you meet all requirements, you may be able to deduct annual contributions of up to $5,500 to your traditional IRA. You can contribute another $1,000 per year if you’re at least 50 years old.
  • Generally, you can contribute to your retirement plan right up until April 15 and still receive your tax deduction.
  • Set up a retirement plan for yourself if you are a self-employed taxpayer, and receive a tax deduction.
  • Set up an IRA for each of your children who have earned income.
  • Minimize the income tax on Social Security benefits by lowering your income below the applicable threshold.


This editorial piece was developed from articles prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014. Landmark Bank also contributed to this article.


IMPORTANT DISCLOSURES: Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Consult with your tax advisor regarding the deductions and eligibility criteria mentioned in this article.