With the 2013 tax extension deadline behind us now, it is time to take stock and prepare for 2014 taxes. This is important to do now as we can take lessons learned from 2013 and take proactive steps to plan for 2014’s taxes. As it is October, we are through 10 months of the year and thus we can have a good grasp on how your 2014 activity will impact your tax position now. Here are some of the top tax tips for 2014’s taxes.
Beware of the Extenders
There are a number of deduction items in the tax code that have expiration dates attached to them and those deductions expired at the end of 2013. These deductions include, for example, using state and local sales taxes instead of state and local income taxes for deduction, the above the line deduction for qualified higher education expenses, and educator expenses for individuals and the 50% bonus first year depreciation for businesses. This is a similar position to where we found ourselves in 2012 when these “extenders” deductions expired at the end of 2011. Congress did extend these deductions for 2012 and 2013, but they have expired again and will take an act of Congress during the lame duck session in November and December to extend them again. While there is an expectation that Congress will act, it remains to be seen. Therefore, it is important to understand if these tax deductions were applicable for 2013 and the impact they will have in 2014 if they are not extended.
Its Harvest Time
As an individual, one of the greatest items in your control is your investment portfolio. As you have the ability to buy and sell your investments, you can make decisions that can directly impact your taxes. One of the most common ways is to harvest gains and losses in your taxable investment portfolio. You can harvest gains by selling long term held investments and immediately repurchasing it. While this does create long-term capital gains which are taxed at the beneficial 15% (or 20% for high earners) tax rate, these gains can be offset by any long-term capital losses that you have. You can also harvest long term capital losses, but you cannot repurchase that same investment until 30 days have occurred since the sale, otherwise you will trigger wash sale provisions that will ignore the sale and the long-term capital losses that were generated. There are two ways around this to harvest long term capital losses and still be invested. The first is to buy that same investment and wait 30 days and then sell the original investment. You will need to have investable cash around in order to do this as you will be doubling down on your investment for 30 days. And when you sell, you will need to specify which investment you are selling so that you sell the investment you bought 30 days prior. The last day to “double up” in 2014 is November 28 in order to allow 31 days to elapse and sell the investment before year-end. If you don’t have the investable cash to do this, you can sell the investment and purchase a similar type investment to harvest the losses. For instance, if you owned the Vanguard S&P 500 Index Fund, you could sell that investment and purchase the Fidelity S&P 500 Index Fund to replace it. You are able to deduct up to $3,000 in capital losses in excess of capital gains in a given year and thus is a good way to reduce your taxes.
Looking Towards Retirement
Another popular way to create a deduction is to make a contribution into an IRA account. For 2014, you can make up to $5,500 in contributions to an IRA ($11,000 if married). Depending on your income level, these deductions can be deductible. The nice part about this deduction is that you have until April 15, 2015 when taxes are due to make this contribution and have it impact 2014 taxes. You can also increase your contributions to your 401k account for 2014 in order to lower your taxable gross income.
These are just a few of the tax planning tips you can take for 2014, however, it is best to consult with a CPA before taking any of these tax planning item to ensure they are the right thing to do for your particular situation. Please feel free to reach out to me via our new client intake form.