Here are some final year-end tax planning ideas for 2014.
Some of these items are more for 2015 than 2014 but now is the time to put them in place.
- If you have a Health Savings Account (HSA) available, maximize your contribution for 2015. Unlike Flexible Spending Accounts (FSA), you do not lose the amount in a HSA that is not used by the end of the contribution year. Some FSAs have been amended to allow a full carryover for two months and 15 days into the next year or a carryover of a maximum of $500. This is an either or option – either the plan allows the carryover of unused FSA money of no more than $500 to the next year OR it allows a two month and 15 day grace period into the next year to allow the use of the rest of the FSA balance.
A HSA allows you to carryover the entire balance as long as you live.
- If you own your own business and want to establish a 401(k) plan for 2014, the deadline is 12/31/2014. Of course, waiting until now severely limits your ability to have much withheld from your pay for 2014 employee contributions. Setting it up now gets you ready for 2015 and it still allows an employer contribution to the 401(k) plan for 2014.
- If you miss the deadline for establishing a 401(k) for your business for 2014, do not forget that a SEP plan can be established up to the deadline for filing your 2014 return.
- If you are harvesting tax losses and reinvesting the proceeds, consider investing in more tax efficient investments. Mutual funds and ETFs that trade actively generally generate more ordinary dividends and capital gains than the invest and hold funds. Index funds are often more tax efficient than actively managed funds.
- Again, if you sell some investments before year-end to harvest the tax losses then consider investing some of the proceeds in tax-exempt bonds, mutual funds or ETFs. If your income tax rate is relatively low, you need to consider whether the tax savings makes sense considering the lower interest tax-exempt investments usually return. Also keep in mind that if interest rates start to go up, the value of tax-exempt bonds, mutual funds and ETFs go down in value as rates increase.
- If your employer does not provide qualifying ACA (aka Obamacare) health insurance then consider obtaining a qualifying health plan so you can avoid a 2015 penalty. The penalty increases for 2015 over what it is for 2014.
- Take 529 education plan distributions in the same year as the qualified education expense. Most colleges and universities like to be paid in December for the following spring semester or quarter. If you or your child happens to be graduating in the spring, they may not have enough qualifying expenses to make a spring 529 plan distribution tax-free.
- Consider a Roth IRA contribution for your children if they otherwise qualify. A Roth allows no deduction but qualified withdrawals are tax-free unlike regular IRA contributions that are generally taxable. If your child’s only income is wages of $4,000 or less, they probably will not owe any federal income tax so not being able to deduct the Roth contribution is no big deal. Your child has until April 15, 2015 to make a Roth IRA contribution for 2014.