This the time of year when it makes sense to explore last-minute ways to ease the tax bite that could be waiting for you on April 15. Here are eight potential ways to shrink your tax liability:
If you expect to owe taxes in April, you could consider changing what you withhold from your paychecks now. You can do this by changing the allowances on your W-4, which is on file with your employer. The less allowances that you claim, the more money that your employer withholds for taxes.
Consider moving credit-card debt, which usually carries a high interest rate, to a home equity line of credit. Interest payments on HELOC debt is tax deductible.
The stuff that’s accumulated in your garage, basement and closets can be turned into a charitable tax deduction. When you donate items to a charity, you need to list their fair value and you must have a receipt to back up your donations.
If you sold stock for a profit, you’d be subject to the federal capital gains tax, but if you gift shares to a charity, you will avoid that tax and pocket a charitable deduction instead.
There is still time to boost what you save in your 401(k), 403(b) or other workplace plan. For 2014, the maximum amount that eligible workers can contribute to a 401(k) is $17,5000 and $23,000 if you are 50 or older. You can also contribute up to $5,500 in an IRA and up to $6,500 for those 50 and older. For self-employed investors using a SEP-IRA, the contribution ceiling is $52,000, which is based on making up to $260,000 in income.
To boost the value of your deductions, pay eligible bills due next year in November or December. Obligations that you could pay early that could boost the value of your deductions could include your property tax bill, your January mortgage and hospital bills.
If you have any stocks or mutual funds that are in the red, consider harvesting these losses by selling them. You can use these losses to offset any investment gains dollar for dollar. If you have more losses than gains, you can use up to $3,000 in excess losses to reduce your taxable income. If you still have excess losses, you can carry them over year after year.
This will be easier to do if you are self-employed or expect to receive a bonus. Check to see if you can defer any bonuses until 2015 and bill clients so they don’t pay invoices until early 2015.
Opening a Flexible Spending Account for next year won’t reduce your tax bill in 2014, but it will help you avoid taxes in the future. You establish a FSA to pay for your medical expenses through your employer and all money is automatically deposited from your paycheck into the account. You aren’t taxed on the contributions and the money sits in the account tax-free. The trick is determining how much money you should withdraw each year because if you don’t use it up, you will lose it.