Tax day isn’t until April 15, but prudent taxpayers know that tax preparation starts now. We reached out to Bashey, Hutchinson & Walter, a Bellevue accounting firm, to get some end-of-year tips.
Christine Bogard, one of the firm’s CPAs, says that one of the biggest mistakes people make is to fail to maximize their 401(k) plans. “This year, workers can contribute up to $17,500 to employer-based plans (same as the 2013 limit). Workers 50 and over can contribute up to $23,000,” she says.
Taxpayers also should know about a new provision that relates to the penalty for failing to maintain health insurance. “A couple of things to note here are that the penalty is not just $95, but is 1 percent of income with a minimum of $95,” Bogard says. “The other is that whoever claims a dependent will be responsible for paying the penalty if the dependent does not have health insurance.”
Bogard also offers these five tips to help taxpayers before the year ends:
- We always send out a large envelope to our clients labeled for the year and “Tax Documents” on it with the instructions to stuff in all of those envelopes with “Tax Document Enclosed” to make sure that all of the necessary information is easy to find when taxpayers are ready to assemble their information to prepare their returns.
- Realize losses on stock to offset investment gains. You can preserve your investment position by selling the original holding and then buying it back 31 days later (no sooner). Also, beware of end-of-year mutual fund purchases just before the ex-dividend date.
- Postpone income until 2015 and accelerate deductions into 2014. Charges on credit cards made by December 31 qualify as paid in 2014 even if the credit card bill is not paid until 2015. However, taxpayers should consider whether income will be more or less in 2015 and also whether that would change their income to eliminate the 3.8% Net Investment Income Tax by balancing taxable income between the years.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the account has declined in value, and you leave that as it is, you will wind up paying a higher tax than you should. You can back out by recharacterizing the conversion (moving the funds back to a regular IRA) and then convert to a Roth IRA later.
- Keep track of charitable giving and get the proper receipts. One of the things we find is that taxpayers fail to keep good records of what they have given to charities when they have cleaned out their closets and garages. There are a number of websites that give good indication of what the value of such items would be in good or excellent condition. And if more than $500 in value of these items is identified, the tax return has to include the charity’s name and address, the date of the donation, the fair market value and original cost. If the items add up to more than $5,000, an appraisal is required as well.