The traditional method of saving taxes still holds true: add up tax deductions for the year that is ending and carry over whatever income you can into the next taxable year. The end of the year is also the time to estimate your tax bill for the year so you can make helpful investments, review expenditures and make income adjustments to offset what you may owe.
Some of the adjustments that you can make are:
- Prepaying your January mortgage bill
- Postponing income bonuses
- Paying college tuition fee
- Making additional contributions to your retirement accounts
- Postponing selling items that generate income
If you, after calculating your 2014 tax bill, find yourself on the lower end of your tax bracket, you may be able to tweak your income and expenditures to drop down into the next bracket.
To avoid capital gains from raising the tax bill for this year, investors can harvest losses for the year to balance out their profits. Additionally, if your investments are in stocks that are trending upward, then you can balance this out by selling some of your interest and investing the money in retirement accounts such as IRAs and 401(k).
Use Tax Credits
Some of the tax credits that can help you save significantly in taxes are:
– Lifetime Learning Credit (nonrefundable)
– American Opportunity Tax Credit (40% Refundable)
– Earned Income Tax Credit (Refundable)
– Elderly and Disabled Tax Credit (nonrefundable)
– Retirement Saver’s Tax Credit (nonrefundable)
You should review the specific qualifying requirements for each credit to avoid errors.
Flexible Spending Accounts and Health Care
Along with contributing to retirement accounts, you can also fund flexible spending accounts and assign the pretax money to pay for dependent care expenses or qualified health expenses. Also, those who bought health care insurance through the exchange and qualify for the premium tax credit will receive help from the government in getting insured. Now is a good time to see if you qualify for the subsidy or if you could be facing a potential balance to the government when it comes time to file.