'Tis the season for year-end tax planning. By making tax moves, particularly those that relate to your investments, as the year winds down, you can pile up tax savings. Here are 14 strategies that may result in holiday cheer:
1. Harvest capital gains. Despite recent tax rate increases, you still can benefit from favorable tax rates if you sell securities at year-end. For instance, the maximum tax rate for long-term capital gains remains 15% for most investors in 2014. It's 20% for those in the top ordinary income tax bracket--still pretty good.
2. Harvest capital losses. If you've already realized gains this year--especially short-term gains taxed at ordinary income rates--you could unload something now at a loss. Your losses can offset the capital gains, plus up to $3,000 of ordinary income in 2014.
3. Maximize the 0% rate. If you expect this year to be a low-income year (for example, if you have a large business loss), a portion of your long-term capital gains may qualify for the 0% tax rate that applies to income in the two lowest ordinary income tax brackets. Try to make sure that you and other family members cash in on this benefit when you can.
4. Buy into dividend-paying stocks. Most stock dividends are taxed at the same preferential tax rates as long-term capital gains under the same basic tax rate structure. To qualify for this tax break, you must hold the stocks paying the dividends for at least 61 days.
5. Minimize NII tax. A 3.8% tax applies to the lesser of your net investment income (NII), which includes capital gains and dividends, or your modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 for joint filers. (If your income falls below those thresholds, you won't owe NII tax.) You can reduce exposure to this tax by lowering your NII and MAGI for 2014 (for example, by investing in tax-free municipal bonds).
6. Sidestep the wash sale rule. If you buy "substantially identical" shares within 30 days of selling securities at a loss, you can't deduct the loss on your tax return. Avoid this "wash sale" rule by waiting at least 31 days to buy back the same shares or buy the new stock first and then wait at least 31 days to sell the original shares.
7. Arrange an installment sale. Generally, you 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 over time, you might pay a lower tax rate for capital gains than if selling the property pushed you into the top tax rate.
8. Boost 401(k) contributions. Try to increase your tax-deferred contributions to a 401(k) plan at work. For 2014, you can elect to defer up to $17,500 to your account ($23,000 if age 50 or over). Besides trimming your current tax bill, it helps build savings for the future.
9. Convert to a Roth. If you have funds in a traditional IRA, you may move some or all of those funds to a Roth IRA, paying income tax now on the converted amount so that most future Roth distributions will be tax-free. If you spread the taxable conversions over several years, you'll reduce the tax bite.
10. Rent out a vacation home. You can write off specified rental activity costs, plus depreciation, but be careful. If your use exceeds the greater of 14 days, or 10% of the days the home is rented out, deductions can't exceed the amount of rental income you receive. Keep an eye on personal use as the year draws to a close.
11. Dust off charitable donations. Instead of tossing out old furniture and clothing, give items in good condition to charity. Generally, you can deduct the fair market value of property donated to a qualified charitable organization, within certain limits.
12. Take RMDs in time. You normally must take required minimum distributions (RMDs) from qualified retirement plans and IRAs each year after age 70½. If you don't, you'll pay a penalty equal to 50% of the required payout. To avoid problems, arrange for RMDs well before January 1.
13. Find a PIG. Under the passive activity rules, you can deduct losses from passive activities, including most investing, only against income from other passive activities. (Special rules apply to real estate.) Investing in a passive income generator (PIG), a special investment that produces passive income, could help increase this year's deductions.
14. Be generous to your family. Finally, under the annual gift tax exclusion, you can give up to $14,000 to anyone you choose in 2014 without paying gift tax. This reduces your taxable estate and generally results in overall income tax savings for the family. Happy holidays!