(This is the first in a two-part series on mid-year tax planning. Read the second article.)
Now that this year’s tax filing season for individuals is over, it’s time to concentrate on saving taxes in 2014. All too often, professional tax advisors don’t reach out to their clients until the very end of the year when it might be too late for them to implement meaningful tax planning strategies. Break up the spring and summer doldrums by presenting these ten ideas for their consideration.
- Harvest losses from securities sales. Capital losses can offset capital gains for the year plus up to $3,000 of ordinary income. Any excess loss is carried over. Thus, this could be an opportune time to realize losses that can offset earlier or anticipated gains. Note that this strategy also reduces exposure to the 3.8% Medicare surtax on net investment income.
- Cash in on 0% capital gains rate. Remarkably, taxpayers in the two lowest income tax brackets can benefit from an unprecedented 0% rate on long-term capital gains. Advise clients who are expecting to have a low-income year, or have a child in a low tax bracket who is holding appreciated securities, to maximize the tax-saving opportunities.
- Arrange an installment sale deal. Normally, you must recognize the entire gain from the sale of property, such as real estate, in the year of the sale. But tax on a portion of the gain is spread out over two or more years through an installment sale. Not only does this defer tax payment, it may reduce the overall tax liability for the seller.
- Sidestep the wash sale rule. The “wash sale rule” prevents someone from realizing a capital loss if substantially identical securities are acquired within 30 days of the sale. Don’t wait until year-end when the wash sale rule could hamper transactions. In lieu of waiting 30 days to buy the same securities, “double up” by acquiring the securities now and hold off selling the original shares for more than 30 days before selling.
- Adjust your portfolio. After a midyear review, you can fine-tune your investments for greater tax efficiency. For instance, you might buy dividend-paying stocks that qualify for the maximum capital gains tax rate of 15% (20% for taxpayers in the top ordinary income tax bracket). Another suggestion for upper-income taxpayers is to increase the allocation of tax-free municipal bonds and bond funds.
- Check out AMT status. It’s not too early to start thinking about the alternative minimum tax (AMT) for 2014. Figure out if it will make sense to postpone recognition of tax preference items, like tax-exempt interest on private activity bonds, to 2015. Alternatively, you might count on pulling more income into this year if the AMT rate, topping out at 28%, will be lower than your regular income tax rate.
- Give away property to charity. Generally, a donor can deduct the fair market value (FMV) of property that’s been owned longer than one year, within certain limits. Do a thorough “spring cleaning” to find households items in good condition that can be donated to charity. Use online resources to establish the FMV of donations.
- Add support for relatives. If you provide more than 50% of the support for a child under 19, or full-time student under 24, you can generally claim a dependency exemption for the child. For other relatives, the recipient also can’t have more than $3,950 in gross income in 2014. Consider that gifts of support to college grads or to a parent on Mother’s or Father’s Day can push you over the 50% threshold.
- Limit vacation home use. A taxpayer who rents out a vacation home may benefit from valuable deductions, including depreciation, that offset rental income. But you can’t claim a tax loss if your “personal use” exceeds the greater of 14 days or 10% of the days the home is rented out. Monitor your personal use in the summer to ensure you don’t cross over the line.
- Latch onto dependent care credit. If you pay a sitter or day care center to watch your young children this summer while you and your spouse work, you may be eligible for a dependent care credit. The maximum credit is generally $600 for one child; $1.200 for two or more children. Note that the cost of sending a child to day camp qualifies for the credit, but not overnight camp.
This is just the tip of the iceberg. When appropriate, schedule meetings with clients to discuss these and other midyear tax planning strategies.