Tax Tip: It’s not too late to lower tax bill for 2014
By The Tax Institute at H&R Block
While there is still uncertainty over dozens of tax breaks that have expired, what is certain is that taxpayers have a little more than a month to take action that could lower their 2014 tax liability and could increase any refund they receive.
Simple steps to a lower tax bill
Almost any taxpayer can do something to lower their tax liability. In some cases, it can be as simple as paying a little more now to get a little back later in return.
- Make a charitable donation.
Making charitable contributions, whether cash, clothing or household items, may lower one’s taxable income. To do so, taxpayers need to give to qualified organizations and itemize their deductions. For example, for every $100 donated to charity, someone in the 25 percent tax bracket could save $25 in taxes. Taxpayers can use an IRS online tool to search for qualified organizations. The Salvation Army donation value guide can help estimate the value of non-cash donations. Taxpayers must keep receipts, pictures or other documentation of the noncash donation.
- Maximize retirement contributions.
Taxpayers may consider increasing or maxing out their 401(k) retirement contributions at $17,500. Contributions are pre-tax, which reduces taxable income and potentially the tax bill. Those 55 and older can actually contribute an additional $5,500. Taxpayers eligible to deduct IRA contributions can deduct contributions made through April 15, 2015 on 2014 tax returns.
- Pay mortgage, tuition and student loan bills early.
Students and parents should consider paying spring college tuition before Dec. 31. If they haven’t already maxed out the American Opportunity Credit, spring tuition can mean a tax break on their 2014 returns. Those repaying student loans may also consider making an extra payment so they can deduct more interest on the 2014 tax return. Taxpayers could pay their mortgage payment due in early January early to increase their itemized deduction for mortgage interest paid. But, tax planning occurs over a two-year horizon, so taxpayers should make sure paying an extra amount this year will not hurt them in 2015.
- Offset capital gains with capital losses.
Those with a large net capital gain in 2014 could reduce their tax liability by selling stock before Dec. 31 if it would generate a loss. Capital losses don’t just offset capital gains – if capital losses exceed capital gains, up to $3,000 of those losses can offset ordinary income, such as wages. A capital loss that exceeds $3,000 can be carried over to future years. However, taxpayers should look at their whole financial picture with an investment advisor and should not make these decisions for tax purposes alone.
Don’t forget to use those tax-free dollars
Taxpayers with a Flexible Spending Account (FSA) contributed those dollars tax free, but the money is under the “use it or lose it” rule. If taxpayers don’t empty their FSA and use up the funds before December 31 (or grace period, if their company’s plan provides one), they’re leaving their FSA money on the table.
It’s not too late for taxpayers to take steps to impact their taxes for 2014. Doing so now can help them avoid some unpleasant surprises next spring – and could even create some good news for their finances.