Now is the time for year-end tax planning

year-end tax planningThe ideal time to address 2014 tax planning is in – you guessed it – 2014. Unfortunately, many taxpayers wait until the tax preparation months of March and April of the following year to begin thinking about strategies to reduce their taxes. Remember, there is a difference between tax preparation and tax planning. Now is the time to address year-end tax planning opportunities that may help reduce the amount you pay to Uncle Sam. Since any additional after-tax income can be applied to other critical goals such as a retirement savings, education funding, paying down debts or even purchasing a home, be sure to review the pro-active strategies below.

Harvest tax-losses and gains

While taxes should not be the overriding factor when developing an investment strategy, it is certainly an important component to consider – especially in taxable accounts. It may be advantageous for some taxpayers to examine their portfolio in search of investments that may have declined in value. Selling off underperforming investments before year-end to lock in a tax loss can be beneficial in many ways. First, losses can be used to offset other investment gains you may have realized this year. This can be especially helpful to combat short-term capital gains taxes, which are taxed at ordinary income rates. Additionally, you are able to carry forward an unlimited amount of losses into future tax years. These losses can be applied toward future gains and you can also write off $3,000 per year of unused losses against ordinary income. Keep in mind that IRS wash sale rules may apply, preventing you from claiming a loss if you buy a substantially identical investment within 30 days of the sale.

Depending on your income level and strategy, tax gain harvesting may be beneficial, too. You may ask why you might want to take a capital gain in a given year. Well, if your taxable income is $73,800 or less for those married filing jointly, or $36,900 or less if filing single, you’re eligible for the zero percent long-term capital gain rate for assets held greater than one year. That’s right: zero percent. This may be useful if you find that your income has suddenly dropped in a given year as this could allow for the sale of appreciated assets at very attractive capital gains rates.

Max out retirement plan contributions

Whether contributing toward a traditional pre-tax 401(k) or an after-tax Roth 401(k), funding your retirement plan to the fullest extent may help reduce your tax liability now or in the future. For 2014, taxpayers can save up to $17,500 in their plan and those over the age of 50 can contribute a total of $23,000. Be sure to determine whether you would benefit more from pre-tax or after-tax contributions.

Business owners should also consider reviewing their existing retirement plan or the implementation of a new plan. From incorporating a cash balance plan to adding profit-sharing contributions, there are many features that may help ensure contributions and respective deductions are maximized.

Review a Roth conversion

Speaking of a Roth, it may be wise to consider converting pre-tax retirement accounts like a traditional IRA to a Roth IRA before year-end. In a Roth conversion, your pre-tax account is withdrawn and placed in a Roth IRA with ordinary income tax paid on the amount withdrawn. Unlike the pre-tax IRA, distributions from the Roth IRA are tax-free in retirement – assuming the account has been held for at least five years. That’s right – no taxes on the earnings and also no required minimum distributions. This can be especially powerful when the account is inherited by beneficiaries. A Roth conversion can make sense if you can answer yes to two questions: One, you feel confident that you will be in a higher tax bracket in retirement and two, you have funds outside the IRA you are converting that can be used to pay the tax bill. It may not be wise to pay the tax liability on the amount converted from IRA funds as it will substantially reduce the balance of the retirement account. Consider working with a professional to run calculations that can simulate the conversion to see if it works for you.

Avoid underpayment penalties

Now is also a great time to carefully review amounts being withheld for taxes. While neither overpaying nor underpaying your taxes is ideal, an underpayment can lead to inadvertent penalties. According to Lee Boss, certified public accountant and managing director at the Mercadien Group in Princeton, “Taxpayers should review estimates of Federal and state tax liabilities to either fully fund expected tax liabilities by year-end or make enough payments as protective estimates, generally 110 percent of the prior year tax liability, to avoid underpayment penalties.” Underpayment penalties can be costly so be sure to review this with your tax professional.

Donate to charity

Charitable donations are a great way to reduce your tax bill while simultaneously supporting an organization that is important to you. While this can certainly be a win-win, there are some important things to remember. First, you must file form 1040, itemize your deductions and donate to a qualified charity in order benefit from the deduction. Form 8283 - Noncash Charitable Contributions, must be filed if your deduction for all noncash gifts is more than $500 for the year. Donated cash or property of $250 or more must be accompanied by a written statement from the organization with a description of the donation amount. Regardless of the donation, maintain clear records to substantiate the contributions being made.


While gifting may not immediately reduce your taxable income, it can help with future estate taxes that could be owed. For 2014, you are able to gift up to $14,000 to whomever you like. With the federal estate tax threshold at $5.34 million per person, many families are less concerned with federal estate tax than ever before. However, many states like New Jersey have lower thresholds and try to impose both an estate and inheritance tax. For this reason, gifting before year-end can be beneficial financially by potentially reducing estate taxes imposed on the state level.

Also consider reviewing any unused amounts in flexible spending accounts and make sure all required minimum distributions, or RMDs, are taken. Remember, the ability to address tax issues is compromised once the year comes to a close. Since everyone’s situation is unique, consider speaking to your financial and tax advisers to determine the most appropriate tax strategies for you.


Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor.  He can be reached for questions at 732-280-7550,, & LPL Financial Member FINRA/SIPC.