By Sheryl Rowling
SAN DIEGO– Year end is approaching. If you act before December 31st, you just might be able to cut down on your 2014 tax bill. Here are five ways to do that:
- Harvest tax losses. If you have investments like stocks or mutual funds, you should take a look at positions that are worth less than what you originally paid. By selling these, you can create a capital loss that can offset capital gains plus up to $3,000 of other income. And, the best part is that any losses in excess of what you can use this year can be carried forward to future years! Just remember to not buy back the same security within 30 days or the IRS won’t let you claim the loss. It’s okay to buy something similar right away. You might want to do this to avoid being out of that area for 30 days. For example, if you sell Ford at a loss, you could replace it with Toyota right away and still hold a position in the auto industry. After 30 days, you can buy back Ford if you want.
- Consider a Roth conversion. If you expect to be in a low tax bracket in 2014, considering switching some or all of your IRA funds to a Roth IRA. The amount you convert will be subject to tax, but not much if you are in a low bracket. By doing this, all future earnings and all future distributions will be tax free. Imagine what all of the tax free compounding can do for your nest egg! This is the only time Uncle Sam allows you to pay tax at a discount.
- Consider harvesting gains. If you are in a zero or low tax bracket, you can actually pay zero tax on some long term gains. So, rather than harvesting losses, you will want to harvest gains on positions held over one year. This is a freebie that means you won’t ever have to pay tax on the appreciation. Be sure to look for Roth IRA conversion opportunities first – that can be a better deal.
- Make charitable donations. Charitable contributions are deductible even for Alternative Minimum Tax purposes. If you want to get a big donation and don’t want to give to any organizations right away, consider a donor advised fund. You can make contributions to the fund, get a deduction right away and then give out grants to your favorite charities over time. While the money is in the fund, it grows tax free allowing your charitable pool to grow. I call these a “charitable IRA.” For more information on donor advised funds, check out the Jewish Community Foundation’s website at www.jcfsandiego.org.
- Use appreciated securities for charitable donations. Many organizations (including your donor advised fund) are set up to receive shares of stock or mutual funds transferred from your investment account. As long as you’ve held the shares for more than a year, you will get to deduct the full fair market value and not pay tax on the gain! This is a great way to get more bang for your charitable bucks!
To be sure you get it right, I recommend seeing your CPA!
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Sheryl Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com