By Marcos Lira
Learn more about Marcos on NerdWallet’s Ask an Advisor
It’s November, and there are three things on the top of everyone’s mind:
1) Should I oven-roast or smoke our Thanksgiving turkey?
2) Should I knock out holiday gifts on Black Friday or Cyber Monday?
3) What can I do to improve my tax situation?
Smoke the turkey and shop online so you can stay in with the family the day after Thanksgiving. Now that we have 1 and 2 checked off, let’s focus on seven other strategies to improve your tax situation for the upcoming tax season.
There are only a few ways to improve your tax situation. One way is to reduce your adjusted gross income (AGI) by working on “above the line” deductions, which can lead to tax-credit qualification. You can also focus on “below the line” deductions and work on increasing your total itemized deductions. Let’s dig into specific ways income can be reduced.
1. Defer your income
If you are able to dictate how you’d like your last paycheck for the year and/or bonus paid, try having the paycheck and bonus paid into your retirement plan, such as a 401(k). For 2014 you can contribute up to $17,500 to your retirement plan, or up to $23,000 if you are over the age of 50.
What if you don’t have a retirement plan at work? If you are under the income limits, make deductible contributions to an IRA. For 2014, the most you can contribute to an IRA is $5,500, unless you are over age 50, in which case, you can contribute $6,500. Self-employed? Ask your brokerage firm about opening a Keogh Plan (solo-K) or a SEP IRA.
2. Take advantage of an HSA
If you are covered by a High Deductible Health Plan, think about maximizing a health savings account (HSA). As a single individual, you can contribute and defer up to $3,300, and for a family, that amount increases to $6,550.
3. Make sure to get all your homeowner deductions
The two most powerful deductions you can make when you own a home is deducting the interest on your mortgage payments and deducting property taxes. Therefore, if you are flush with a little extra cash after the holidays, consider making January’s payment in December. Please keep in mind that only the individuals responsible for the mortgage loan can take the deduction.
4. Go green
I’m not talking about painting your home green, as I am confident your neighbors won’t appreciate your “artistic” taste. The Residential Energy Efficient Property Credit allows you to claim 30% of the cost of qualified property. Some examples of qualified property include solar hot water heaters; solar electricity equipment and wind turbines installed on or in connection with a home located in the United States; and fuel cell property installed on or in connection with a main home located in the United States.
5. Get altruistic
Donations are one of the best ways to fund your ideals while receiving a tax deduction for your contributions to qualified charities. Depending on the charity, your contribution may be limited to a 50% deduction, 30% deduction or a 20% deduction. Please consult your tax advisor for more information.
6. Separate the winners from the losers
Tax gain/loss harvesting is a strategy that can reduce your tax liability now and in the future if done correctly. This strategy involves identifying and selling off your loss positions to offset your appreciated equity positions. Here is a quick example. Position A in your investment portfolio is trading at a loss, but Position B is doing wonderfully, and it appears that it may have reached its ceiling. If you sell Position B, there might be a huge short-term or long-term capital gain, but the tax liability can be softened by selling your losing Position A.
7. Bundle “below the line” deductions
If you haven’t done so already, now is the time to start tracking all your deductions that can be claimed on schedule A. If you are close to reaching or surpassing the medical deduction threshold, you should start scheduling medical procedures and paying your medical bills before the end of the year, in addition to keeping track of your miles traveled to medical appointments. If you are under age of 65, the threshold is 10% of AGI, and if you are over age 65, it is 7.5% of AGI.
Here are other deductions to keep in mind:
- Gambling losses up to the amount of gambling winnings
- Job search expenses in your present occupation
- Investment fees and expenses
- Tax-preparation fees
Tackling these tax turkeys this month can lead to a happier holiday season and fewer headaches come tax day in April.