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14 Sure-Fire Midyear Tax Planning Moves In ‘14

Even as we approach the midpoint of this year, it’s still not clear whether some favorable tax provisions that officially expired last year will be extended retroactively into 2014. Yet while that uncertainty could affect your tax planning for this year, there’s plenty we do know that you could act upon. Consider these 14 midyear tax strategies for ’14:

1. Sell securities at a gain. Despite recent tax law changes, you still can benefit from rules that give you a tax break on investment sales. The maximum tax rate for long-term capital gains is only 15% (or 20% for those in the top two ordinary income tax brackets). However, some upper-income investors also may have to pay a surtax of 3.8% on capital gains.

2. Harvest capital losses. If you’ve already realized gains—particularly short-term gains taxed at ordinary income rates reaching as high as 39.6%—you might be able to sell losing positions to offset those profits. If your losses exceed your gains, you also can use them to erase up to $3,000 of ordinary income in 2014.

3. Max out on 0% rate. If you expect your income to be low this year—for example, if you incur a substantial business loss—a portion of your long-term capital gains may qualify for the 0% tax rate that applies to investors in the two lowest ordinary income tax brackets.

4. Avoid the wash sale rule. If you acquire “substantially identical” securities within 30 days of selling an investment at a loss, you won’t be able to deduct the loss on your tax return. This “wash sale” rule can be avoided by waiting at least 31 days to buy back the same securities. Or you could buy the additional shares first and wait at least 31 days to sell your original holdings.

5. Invest in dividend-paying stocks. Most dividends are taxed at the same preferential tax rates as long-term capital gains. To qualify for this tax break, however, you have to hold the dividend-paying shares at least 61 days.

6. Arrange an installment sale. You usually can defer tax on the sale of real estate or other property if you receive payments over two years or longer. Not only do you stretch out your tax payments, but you also might reduce the effective tax rate if you stay below the thresholds for the higher capital gains rate and the 3.8% surtax.

7. Contribute to a 401(k). Another way to reduce your tax liability is to increase contributions to a 401(k) plan where you work. For 2014, you can elect to defer as much as $17,500 to your account ($23,000 if you’re age 50 or over). You won’t be taxed on those contributions, which can compound tax-free until you make withdrawals from the account during retirement.

8. Convert to a Roth IRA. If you have money in a traditional IRA, you can convert some or all of those funds to a Roth IRA. The amount you convert will be taxed as regular income, but you could ease that pain by spreading out the conversion over several years. And you’ll be able to enjoy tax-free distributions during retirement with a Roth.

9. Sell the old homestead. Tax law allows you to exclude tax on up to $250,000 (for single filers) or $500,000 (for joint filers) of profit on a home sale if you’ve owned and used the home as your principal residence at least two of the past five years.

10. Rent out a vacation home. You can write off certain rental activity costs, plus depreciation, but you must be careful. If your personal use exceeds 14 days or 10% of the days the home is rented out—whichever is greater—deductions are limited to the amount of rental income.

11. Help support your new college graduate. Generally, you can claim a $3,950 dependency exemption for a child graduating from college in 2014 if you provide more than half of the child’s annual support. It might work out to your advantage—to say nothing of your child’s—if you provide a gift that puts you over the half-support mark.

12. Dust off charitable donations. Instead of tossing out old furniture and clothing, you could give items in good condition to charity. You generally can deduct the fair market value of property donated to a qualified charitable organization, within certain limits.

13. Adjust your withholding. If you have too little income tax withheld from your paycheck you could be penalized for not making estimated payments—a penalty that’s easy to avoid.

14. Give generous gifts. Finally, under the annual gift tax exclusion, you can provide up to $14,000 to any family member in 2014 without any gift tax consequences. Meanwhile, such gifts reduce the size of your taxable estate.


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This article was written by a professional financial journalist for Houston Asset Management and is not intended as legal or investment advice.

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