Despite the market volatility of late, you'll likely still end 2014 with gains in your nest egg -- as well as a bigger potential tax bill. If you spend the time, however, your year-end planning could trim the tribute you must pay to Uncle Sam.
Some experts expect that capital-gains tax bills will be higher in 2014 than in 2013. For several years, investors used carryover losses from the 2007-09 market downturn to offset profits taken in later years. But after a period of sustained market gains, "most people today are not sitting on losses of any substance," says
For the second year, wealthier investors will likely feel the biggest tax pain. Those with taxable incomes above
Taxpayers with modified adjusted gross income that exceeds
Investment maneuvers. Despite the general market upswing, there could be "downers" in your investment portfolio, says
Beyond harvesting losses, look for other strategies to keep modified AGI below the 3.8% surtax threshold. Even if the surtax is not an issue, these strategies will trim your tax tab. If you're selling land or a business, you can spread payments over several years with an installment sale. The self-employed could defer some billings until next year. Another potential maneuver: "If you can, arrange with your employer to defer a bonus until 2015," says
If you're planning to give to charity, consider donating appreciated stock rather than selling the stock and giving cash. "That lets you bypass the step of paying tax on the appreciation," says
Giving appreciated stock to a parent or adult children can make sense, too, rather than selling stock to make a cash gift. If the recipient of the gift sells the stock, he or she may pay capital-gains taxes at a lower rate, says Geraghty. You can't deduct the gift, but less may go to the
Zero capital gains. Taxpayers in the 10% and 15% income tax brackets continue to benefit from the 0% federal rate for long-term capital gains. To qualify, your 2014 taxable income cannot exceed
Thomson
The zero capital-gains rate only applies until your income pushes through the top of the 15% bracket. You'll pay the 15% capital-gains tax for profits that exceed the 15% bracket. And beware that although the gains may be tax free at the federal level, they will be included in your AGI, which could make more of your
Roth conversions. This could be a good time to convert part of your traditional IRA to a Roth, Franklin says. Investors can get a better sense of their AGI in November and December, after most mutual funds distribute capital gains, interest and dividend income. "We then know how much wiggle room the client has left before hitting the top of the tax bracket," Franklin says. You must pay income tax on the amount of the conversion.
Franklin says taxpayers who are converting do need to take care that their modified AGI does not exceed the 3.8% surtax threshold. You also will trigger income-related premium surcharges for Medicare Part B and Part D once modified AGI exceeds
You could ease the tax bite of a Roth conversion if you have big deductions, such as large medical expenses. If either spouse turns 65 before the end of the year, you can deduct any medical costs that exceed 7.5% of your AGI; the threshold is 10% for younger taxpayers.
Retirement plans. You can limit both AGI and taxable income by socking away more pretax money in your retirement plans. "Check your most recent pay stub to see if you're on track to maximize your 401(k)," Luscombe says. You have until your last paycheck in December to make 401(k) contributions and until next
Taxpayers who have a health savings account linked to a high-deductible health insurance policy should fully fund the HSA before year-end, Geraghty says. You can make a tax-deductible or pretax contribution of up to
An HSA contribution also has long-term tax benefits, Geraghty says. "You can let the money sit there and it can grow tax free for 20 years," he says. You can withdraw the money without tax or penalty to pay for medical expenses.
IRA-to-charity maneuver.
You could see if lawmakers decide to approve the maneuver, but don't wait too long. You should give your IRA custodian enough time -- by mid December -- to get your RMD and charitable donation paperwork in order.
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Susan B. Garland is Editor of Kiplinger's Retirement Report magazine.