If there is such a thing as a tax planner that has gone ‘mainstream’, it’s Richard Covey. The former lawyer crafted some of the most complex and efficient forms of trusts in the 1990’s for the well-known Walton family. These vehicles and the planning methods they employ continue to be used today and are even described by him as ‘romantic’ and ‘beautiful’. While you may not feel as inspired about tax planning as Covey, the savings you’ll yield by employing techniques to reduce your tax burden will make them seem elegant.
Not all tax-planning techniques are complicated. In fact, most people have heard of most of the following popular practices which have for the most part, been around for some time (not a lot has changed in the tax landscape for 2014). Even though they may not be byzantine, these techniques are popular for a reason. From the perspective of saving money, as long as your tax planning techniques are efficient and legal, they can all be considered effective.
Gifting Appreciable Assets
As always, gifting is a popular way to remove appreciated/appreciable assets such as stocks and bonds from your estate. Doing so is beneficial for a number of reasons. First, these securities can generate income to support loved ones. Second, their appreciation and ultimately the capital gains from their growth may be taxed at a lower rate for the individual they are gifted to. Third, while this method has been popular for a long time, it became even more so with the introduction of the Medicare surtax. By removing these assets, you can avoid unnecessary taxation that the surtax creates. Finally, having them removed from your estate now, before they appreciate more, can help in reducing any potential estate tax burden you may face.
Contributions to Retirement Accounts
Although IRS guidelines only allow 401k contributions through the end of the calendar year, you can still make contributions to an IRA through April 15, 2014 to reduce your tax burden for 2013. Known as the Saver’s Credit, the IRS allows contributions to certain retirement plans to generate a non-refundable credit that primarily benefits low- and moderate-income workers. Don’t forget that even though 401k plans can help defer and may ultimately lower your tax burden, any matching that employers provide make these plans a prime candidate for your retirement contributions. The rules for catch-up contributions remain an effective way of saving for retirement.
Planning for Tax-Advantaged Medical Accounts
Flexible savings plans and Health Savings Accounts (HSAs) are popular benefits that many employers offer. If so, you may want to take advantage of these plans by contributing pre-tax dollars toward your healthcare costs. Because of their benefits, HSAs have been growing swiftly over the past few years. According to ahip.org, HSA enrollment reached nearly 15.5 million in America in 2013, up from 6.1 million in 2008. An HSA is particularly beneficial because of the contributions that employers offer, the tax-advantaged nature of these accounts, and the ability to carryover contributions to future years.
Decreasing Withholding
While it does not necessarily save tax dollars, decreasing your withholding amount if you are receiving outsized refunds at year-end will save you from what is essentially an interest-free loan to the government. It may feel nice to receive that check at the end of the year, but the refund that you are receiving is because it was always your money anyhow. This money could have been working for you in the meantime.
Deductions that Are No Longer Allowed in 2014
In addition to taking advantage of the aforementioned tax planning strategies, being aware of what strategies will no longer be allowed is just as helpful. In 2014, the deduction for state and local sales tax is eliminated. The same goes for tax-free IRA distributions to charity, the $250 educator’s expense deduction, the energy-efficient home improvement tax credits, the deduction for mortgage insurance premiums, and the educational above-the-line tax deduction.
As always, your particular situation is unique and requires individual attention. Contact your tax advisor for additional information on how to employ these, or other, techniques that will help you to most efficiently manage your wealth.
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