In keeping with the season, here are a few last-minute tax-saving tools.
- First, and perhaps most obviously, it is not too late to make a Traditional IRA contribution for the 2014 tax year. The contribution, which for most taxpayers is capped at $5,500 ($6,500 for those 50 and over), can be made any time prior to April 15, 2015. Keep in mind, the deductibility of Traditional IRA contributions is subject to phase-outs and limitations based on your individual tax situation. April 15th is also the deadline for making a Roth IRA contribution for those who qualify. While this approach won’t reduce your tax bill today, it can be a valuable planning technique to avoid taxes in the future. Ask your tax preparer if you are eligible.
- We are all well-aware of the incredible increases in health care costs. For those that qualify, a Health Savings Account (“HSA”) provides a tax-deduction for contributions up to $3,300 for individuals and $6,550 for families (plus an additional $1,000 for those 55 and over). Similar to Traditional IRAs, the contribution can be made by April 15, 2015 and may result in savings of several thousand dollars.
- Remembering to tell your accountant about major life changes may seem simple enough, but a surprising number of taxpayers leave money on the table by forgetting to mention to their CPA the birth of a child, changes in employment, a parent or another family member becoming financially dependent, or making a significant purchase, to name a few. After all, most of us only meet with our tax professional once per year, and often not in-person nowadays. While this may feel a bit personal, the tax benefit can be quite meaningful.
- Start planning for next year while taxes are on your mind. We’ve provided a few examples below to get you thinking:
For self-employed individuals, creating a Solo-401(k) can allow deferrals of up to $53,000 in 2015. This is especially valuable for reducing taxable income in high-earning years.
For business owners, setting-up a company 401(k) provides a deduction for contributions made on behalf of employees, the potential for a $1,500 Federal tax credit, and a powerful incentive to your employees.
For working parents, using an employer-provided Flexible Spending Account (“FSA”) rather than claiming the dependent care credit may provide better bang for your buck.
If you are retired and withdrawing from retirement accounts, supplementing Traditional IRA distributions with funds from your Roth IRA may be an avenue to keep your taxable income in check and prevent expensive additional taxes such as the 3.8% net investment income tax.
We hope these ideas help you in thinking about your individual tax picture. As with any conversation about taxes, every situation is different and we must add the important disclaimer that the information presented here should not be construed as individual tax advice.