Summer is the perfect time to begin your year-end tax planning so that you have time to identify the strategy (or strategies) that work for you and implement them well before year end.
- Try to avoid the new 3.8% net investment income tax (NIIT). It only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain – and applies to “unearned income” which means investment income such as interest, dividends, capital gains, rent and royalty income.
- If you realized capital gains earlier this year, you can sell securities now at a loss to offset those gains, plus up to $3,000 of ordinary income. Otherwise, the maximum federal income tax rate on short-term gains is 39.6% or 20% on long-term gains, and you may also owe the 3.8% NIIT and state income taxes.
- Generally, you can defer part of a gain on sales of real estate property if you arrange to receive payments over a period of two years or more. So you may be able to defer income tax and reduce your exposure to the 3.8% NIIT tax.
- Is your vacation home vacant when you are not using it? Why not rent it out? If you lease it to tenants, you can write off certain rental activity costs, including depreciation. However, if your personal use exceeds the greater of 14 days or 10% of the days rented, the IRS limits deductions to the amount of rental income.
- If your child graduated from college this spring, they may have already landed a job. Nevertheless, you can generally claim a dependency exemption for the child in 2014 if you provide more than half of their support. Perhaps an extra-generous graduation gift will push you over the half support mark?
- Wrap up that spring cleaning project and donate old household items and clothing in good condition to a qualified charitable organization. For most noncash items you can claim a charitable deduction based on their fair market value.
- If your child (under age 13) goes to day camp this summer while you and your spouse work, the cost qualifies for the dependent care credit (but not for overnight camp). The maximum credit is usually $600 for one child; $1,200 for two or more children. Note that this tax break also applies to specialty camps geared to a specific activity like soccer or computer science.
- For 2014, you can elect to defer up to $17,500 in salary to your 401(k) account through withholding; $23,000 if you are age 50 or older. Once you clear the Social Security wage ceiling ($117,000 for 2014), you can use all or part of the payroll tax savings to help fund your 401(k).
By Pamela Wheeler, EA