More Savvy Year-end Tax Moves

Smart strategies that may save you money and make it less stressful at tax-filing time.December 2014By FIDELITY VIEWPOINTS

Tax bills can’t be escaped, but they may be reduced. But to take advantage of most tax strategies, you need to be prepared before the end of the year. So take a moment and review these ideas to help get you started.

(For more ideas, read part one of this series)

7. Beware of deduction limitations.

Thresholds and limits apply to many types of deductions, including medical expenses and charitable contributions, which could lower or even eliminate your deductions. If you’re a high earner, another concern is the Pease limitation, which affects single taxpayers with taxable income of $254,200 or more, and married couples filing jointly with income above $305,050. Finally, if you’ve been subject to the alternative minimum tax (AMT) in the past or think you might be this year, you should reevaluate your itemized deduction strategy. Under the AMT, many deductions are disallowed. Read Viewpoints: "The AMT and you."

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8. Defer income.

On the flip side of accelerating deductions is deferring income. Not everyone has the option to push income into next year, but if you can, you might consider doing it. This may also keep your income below the level that would subject you to the net investment income tax this year. But take into account what you expect your tax situation to be next year. If you anticipate earning significantly more next year and moving up a tax bracket, deferring income might not make sense for you.

9. If you’re a same-sex couple, evaluate your options.

The legal status of same-sex marriage has changed greatly over the past couple of years and continues to be affected by judicial and administrative rulings. In general, however, legally recognized same-sex married couples now have the option to jointly file federal income taxes and, in many cases, state income taxes. If you’re in this group, you may have new possibilities for managing your tax situation, the benefits and drawbacks of which will vary from couple to couple. If you think you might file jointly for the first time with your 2014 return, you should evaluate your situation before the end of the year to optimize your tax strategies. Unless you’re well versed in tax regulations, you should consult a tax professional—preferably one with expertise in same-sex marriage law—about the strategies that are right for your situation.

10. Know your flexible spending account (FSA).

The standard advice for people with an FSA at work used to be to spend the money on medical expenses before the end of the year or lose the balance. A change in the law, however, now allows employers to offer either a 2½-month grace period to use up the money for the previous year or a $500 carryover per year to use in the following year. The new flexibility isn’t automatic, so make sure you know the rules for your employer’s plan, or you will run the risk of losing some of the money you deferred into an FSA.

11. Get health insurance or face a penalty.

The Affordable Care Act (ACA) requires every individual, with some exceptions, to have qualifying health insurance coverage in 2014 or owe an “individual responsibility payment” of the greater of 1% of household income above the income tax filing threshold ($10,150 for an individual) or a flat amount of $95 for an adult and $47.50 per child under age 18, up to a maximum of $285. The payment will be due with your 2014 tax return. If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you’re uninsured for less than three months, you don’t have to make a payment.

12. Watch for last-minute Congressional action.

Several popular tax breaks that expired this year have yet to be reinstated by Congress. Among the most significant is the sales-tax deduction, which gave taxpayers in states with low or no income tax the option of deducting state and local sales tax instead of income tax. If you live in one of those states and were planning to accelerate a large purchase before the end of the year—a car or a boat, for example—to take advantage of the sales tax deduction, you might hold off to see what Congress plans to do. Other tax breaks that are up in the air are those for certain unreimbursed teachers’ expenses, tuition, mortgage insurance premiums, exclusion of employer-provided mass transit and parking benefits, and exclusion for debt forgiveness on foreclosed homes.

Twelve tips aren’t enough? Here’s one more as a bonus: Start now to manage your 2014 tax bill and to begin putting in place longer-term strategies for 2015 and beyond. Early tax planning is always smart tax planning.

Learn more

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917


This content was provided by Fidelity Investments and did not involve the Kiplinger editorial staff.