Last year, more than 50 popular tax provisions expired and, unfortunately, we don’t know if they will be extended for this year. With the end of the year quickly approaching, it is important to take advantage of current tax benefits, invest for retirement in a tax-efficient manner and share your wealth with loved ones!
Click here for more tax information and to get the updated contribution limits for your retirement accounts for 2015.
Unless Congress steps in, some of the most popular tax benefits will expire, including these:
- Deducting state and local sales taxes
- Limited deduction for tuition expenses
- $250 educator deduction for teachers
- Tax-free charitable distributions from IRAs
- Work-opportunity tax credit
- Alternative fuel credit In the past, Congress has reinstated benefits like these retroactively. Make sure you check with your tax professional to get the latest information.
In the meantime, here are tax benefits to take advantage of before the end of the year:
- Combine your itemized deductions. Many expenses can be deducted if they go over a certain percentage of your adjusted gross income (AGI). For example, for medical expenses, they have to exceed 10 percent AGI, or 7.5 percent if you are age 65 or older. Consider moving a procedure to this year or postpone it until next year to combine your medical expenses so you exceed the threshold. You can do the same for professional fees (financial planning, legal advice, tax planning), unreimbursed business expenses (travel, vehicle costs), and job search expenses (employment agency fees, travel, preparation of resumes), which have a 2 percent AGI floor.
- Increase retirement account savings. The 2014 contribution limits to a 401(k) is $17,500, and $5,500 for an IRA ($6,500 if you are age 50 or older). It’s not too late to contribute more to your qualified retirement account if you haven’t maxed out. Only a traditional IRA, or SEP and SIMPLE IRA if you are a business owner, reduce taxable income. A Roth IRA does not, but you will get the benefit when you take the money out. Click here to learn the differences.
- Look at a Roth IRA rollover. Some people who want the benefits of a Roth IRA can rollover their traditional IRA into a Roth. If you do this, you will have to pay the tax on the conversion. If you think your income is lower this year, it may make sense to do it. If you did it this year already, and the value of your IRA went down, you still have until your filing deadline to reverse the conversion. This way, you can perform the conversion later and pay less tax.
- Use your gift tax exclusion. You can give up to $14,000 (or $28,000 with a spouse) tax-free to as many people as you like for 2014. Consider giving it to your children, grandchildren or beneficiaries. If you give your money up to the gift exclusion max every year, you can lower your taxable estate over time.
- Student loan interest paid. If you are the one who paid student loans, you can deduct up to $2,500 in interest every year. If your parents repaid the loan, you can still take the deduction as if they had given you the money and you paid the loan yourself.
In Part 2, we will cover more tax-saving tips!