Year-end Tax Saving Strategies

While Madison does not provide tax or legal advice, we wish to highlight two strategies our CPA friends have shared with us that under the current rules may help you to reduce your tax bill.  These strategies are to 1) ensure you take advantage of all deductions and tax reductions to which you are entitled, and 2) to use tax efficient tactics when gifting assets to charities and/or individual recipients.

“Helping people doesn’t have to be an unsound financial strategy.”   Melinda Gates, Philanthropist

Tax Efficient Giving:

Giving to charity or friends and family in need is a life goal shared by many.  While giving often takes the form of writing a check or making  a cash donation, there are several planning techniques that can reduce out of pocket costs while  maximizing  the financial benefit of the gift.

• Gift Appreciated Assets, not cash: Consider replacing cash gifts with gifts of appreciated assets. When donating to a charity, the charity will not incur capital gains tax when selling the asset and converting to cash as an individual would if they had to sell an appreciated asset to donate the funds to a charity. Donated securities must be held for more than one year, or the donor’s deduction will be limited to basis, generally the initial purchase price. Additionally, if you plan to make a gift of stock or other property by year-end, be sure to allow enough time to make the transfer. Also, be sure to obtain a receipt. An unacknowledged gift of over $250 is considered non-deductible by the IRS.  This rule is strictly enforced and deductions can be disallowed even when there is substantial compliance with the rules. Note also that while you can donate items other than securities (i.e. cars, boats, or collectibles) the IRS will require a bonafide appraisal for the value which must be listed separately on your return.
• Be mindful of private gift limits: Federal tax law allows you to give up to $14,000 per person, per year to as many individuals as you want, without triggering any gift tax. If you combine gifts with a spouse the amount doubles to $28,000 per individual recipient, per year. In addition to these amounts, donors can gift unlimited funds for qualified educational and medical expenses so long as the gift is paid directly to the educational institution or medical facility.
• Support higher education: Another way to gift funds is through 529 college savings plan. Anyone can open a 529 plan account for the benefit of another person or for themselves. The tax benefits are two-fold – you may save via a state income tax deduction, and funds held in the 529 plan grow and are withdrawn tax free as long as they are used for higher education. This is one area where the above-mentioned annual gift tax limits can be exceeded. Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can make a lump sum contribution of up to $140,000.

Maximizing Deductions:    

• Miscellaneous Deductions: At year-end, provide your CPA with details as to all of your qualifying miscellaneous expenses as you may be able to write off those expenses exceeding 2% of your Adjusted Gross Income. Some examples of these expenses include: income tax return preparation costs, investment management fees for taxable portfolios, safe deposit box fees, and investment-related subscription fees. A couple of caveats are that higher income taxpayers face income limitations that reduce or eliminate these deductions, and some items may be reversed if you are subject to the Alternative Minimum Tax.
• Double Check Carryovers: Two major carryovers often omitted on subsequent year’s tax returns are Capital Loss and Charitable Contribution Carryovers. The Capital Loss Carryover is a valuable asset used to offset realized capital gains in current and future years, and also to offset a modest amount of regular annual income until the carryover is completely used up. Charitable Contributions exceeding a prior year’s deductible amount can be taken against future years’ income. The carryover can be used in each of the next 5 years but not beyond that time
• Consider the state sales tax deduction decision: Taxpayers have the option to claim a deduction for the greater of state and local income taxes, or state and local general sales taxes. The latter option is often beneficial for residents of low or no income tax states. It’s also valuable should you make a large purchase incurring high state and/or local general sales taxes (i.e. an expensive car or boat).
• Confirm lesser-known credits: Some examples of lesser-known credits include the Child and Dependent Care Credit applicable to parents with children under age 13 and attending daycare. The credit value is between 20% and 35% of the total cost of care and can amount to a deduction of up to $6,000 annually for two or more children. Similarly, families with dependent college students may qualify for a Lifetime Learning Credit for qualified education tuition, fees, books, supplies. The 2014 annual limit is up to $2,000 for qualifying tax payers. There is no limit on the number of years the Lifetime Learning Credit can be claimed but Adjusted Gross Income limits apply.

These are just two of many effective strategies to help you manage your personal tax exposure.  Please be sure to consult with your CPA to see if these or other tax savings strategies apply to you.

“The Art is not in making money but in keeping it.”       Proverb