Effective tax planning requires considering both this year and next year - at a minimum. Without a multi-year outlook, you can't be sure that maneuvers intended to save taxes on your 2014 return won't backfire and cost additional money in the future.
Also, you should consider the Alternative Minimum Tax (AMT) in your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem.
Listed below are some ideas to consider:
Increase "Above-the-Line" Deductions - Many tax credits are subject to Adjusted Gross Income (AGI)-based phase-outs, meaning only taxpayers with AGI below certain thresholds can benefit. You can effectively reduce your AGI by increasing "above-the-line" deductions. These deductions include Health Savings Accounts and Retirement Plan contributions. Increasing your Retirement Plan contributions and your HSA contribution can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for married filing joint returns ($200,000 for single).
Consider Deferring Income - For sales of property, consider an installment sale that shifts part of the gain to later years, or use a like-kind exchange that defers the gain until the exchanged property is sold. If you own a cash-basis business, delay billings so payments aren't received until 2015, or accelerate payment of certain expenses.
Check Partnership & S-Corporation Stock Basis -
If you own an interest in a partnership or S-Corporation, your ability to deduct any losses it passes through is limited to your basis. If you expect the entity to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution before year-end.
Avoid the Hobby Loss Rules - Many small business may end up showing a loss for the year. The IRS can deem that certain business losses are considered "Hobby Losses", and consequently non-deductible. Thus, if your business is expecting a loss this year, we should talk before year-end to make sure we do everything possible to maximize the tax benefit of the loss.
Charitable Giving - Consider using a credit card. Donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Charging donations to your credit card before year-end enables you to increase your 2014 charitable donations deduction even if you're temporarily short on cash.
Harvest Capital Losses - Review your securities portfolio for any losers that can be sold before year-end to offset any gains you have already recognized this year. As always only sell such stock losers if it makes economic sense.
Maximize Contributions to 401(4) Plans - If you have a 401(k) plan at work, contribute as much as you can, especially if your employer/company makes matching contributions.
Federal Income Tax Withholding - If it looks like you are going to owe income taxes for 2014, consider increasing the federal income taxes withheld from your paychecks now through the end of the year.
Flex Spending Accounts (FSAs) - If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2015 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Keep in mind that FSAs are "use-it-or-lose-it" accounts - only set aside what you'll likely have in qualifying expenses for the year.
Required Retirement Distributions - If you have reached the age of 70 ½, the law generally requires individuals to take withdrawals from their retirement accounts based on their age and size of their accounts. This is known as the "Required Minimum Distribution", or RMD. Failure to take the RMD can result in a penalty of 50% of the amount not withdrawn. If you turned 70 ½ in 2014, you can delay your 2014 RMD to 2015, if you choose. However, by doing this, it will result in two distributions for 2015 - the RMD for 2014 and the RMD for 2015 which may put you in a higher tax bracket.