The summer is quickly coming to an end and this time of the year presents a timely checkpoint to review options for reducing your tax bill. The new tax rules created from the American Taxpayer Relief Act have been in effect since 2013 and many individuals and families are continuing to look for practical ways to reduce taxes.
Here are a few possible areas to consider for 2014:
- Convert traditional IRAs to Roth IRAs. While this decision is based on each individual’s situation, those individuals whose income is above the Roth IRA limits can still fund a Roth IRA by converting a traditional IRA. Conversions are considered ordinary income and will be taxed at the individuals’ current tax rate. Unlike a Traditional IRA, a Roth IRA grows tax-free and does not have required minimum distributions after age 70 ½.
- Contribute to a Health Savings Account. If enrolled in a high deductible health plan, individuals and families can set aside money in a Health Savings Account to pay for qualified medical expenses. The contributions are tax deductible and will grow tax-free if the distributions are used for qualified medical expenses.
- Optimize the tax exposure of portfolio investments. Tax inefficient investments such as bond funds generally pay out monthly income that could trigger exposure to the additional 3.8% Medicare surtax. Consider placing bond funds and higher dividend paying investments in tax-deferred accounts (such as IRAs and 401ks) and equity funds in taxable accounts. Over time these simple moves could result in thousands of dollars in tax savings.
- Donate using appreciated stock investments. Many people donate cash to their favorite non-profit organizations while taking a charitable deduction on their tax return. With the growth of equity markets over the past five years, some individuals may want to directly gift appreciated stock that they may want to sell. This method could still fulfill the donor’s intentions while avoiding capital gains that would have been taxed if the cash proceeds were donated instead of directly gifting the stock.
- Take advantage of matching company retirement plan contributions. Depending on the type of plan, many employers provide retirement account contributions on behalf of the employee up to a certain percentage of salary or percentage match. Take advantage of this “free money” to help boost retirement savings above and beyond the maximum annual amount an employee can contribute.
As always, please consult your tax professional regarding your individual tax planning needs.