STOP PROCRASTINATING...PREPARE NOW TO SAVE!!
Two months left this year (or a month and a half if you ignore the last part of December with all the holidays and vacations), so you need to do some self-help tax planning now to try to reduce your April 15th tax bite! But you say -I do not make a lot of money and have only a small amount of savings. I cannot buy office equipment to depreciate or expense. I cannot sell losing stock because I do not own any! Can I do anything?
Of course! Do some-or ALL-of the following.
1. Pay your January 2015 mortgage payment in December 2014. This helps individuals as well as businesses who pay their building mortgages early. The interest that is owed will be included in this year's Mortgage Interest Statement. The shorter time you owned your home, the higher the interest. May not make a big difference if you are lucky enough to only have a few years left on your mortgage though, but for everyone else it may be a good deal.
2. Delay the Work Bonus, or last paycheck. If they are dated and received after December 31, 2014, it will be included in 2015 income, not 2014. Many businesses do not mind postponing bonuses, though paychecks being delayed are not popular unless you are a 1, 2, or 3 person business and all agree.
3. Delay Invoicing. If you are in business or are an independent contractor, you can delay invoicing the contractor or client from December 31, 2014, until January 2, 2015. Those "sales" are now included in 2015 revenue. For cash basis accounting, you would not deposit receipts on the 31st. The drawback is that you will have to leave money in the safe over the holiday, which may not be a good idea.
4. Include All Expenses/Bills. Make sure you account for all your expenses this year. If your vendor sends you an invoice and it is dated December 30th or 31st, make sure you use that date so your accounting system includes it in 2014, assuming you are on an accrual basis. Often people put the bill date as the date it was received (or the date it is entered into their accounting system) instead of the date it was actually billed or mailed. The invoice date is almost always on the bill itself. By not dating a December 31, 2014, bill as 2014, but rather using January 2, 2015, then puts the expense in the next year. Note that you cannot just date a January 2015 bill as December 2014. It must be a legitimate 2014 expense.
5. Pay Expenses Early. If you do taxes on cash basis, then pay the business bills you receive in 2014 early instead of waiting until 2015. This will reduce your income, thus saving you taxes for tax year 2014. Remember that a cash basis expense only becomes an expense when paid...or put on a credit card. Anything entered on a credit card is deemed paid as of that date.
6. Medical Expenses. If you had a lot of medical expenses (more than 10% of your AGI, or Adjusted Gross Income...Line 37 of your 1040), and you need more tests or surgery, consider doing it in 2014 rather than 2015. It is typically very hard for most people to hit that 10% of AGI mark. If you are there now, and more medical procedures are needed in January 2015, I would try to pull it into December 2014 for the tax break. If you do not pull it into 2014, it may be difficult to get back to that 10% of AGI during 2015, or I hope that you do not get there for your health and family's sake.
7. Retirement Funding. If you have not, put whatever you can into your IRA, up to $5500 (or $6500 if you are older than 55). Even $500 or $1000 will help trim the tax bill. Generally, if you already put money into your business 401K, SEP, or Simple, the IRA may not be allowed. Verify first.
8. Estimated Tax Payments Early. Pay the January 2015, Estimated Tax Payment to Ohio (or your State), and City in December 2014. The payment will increase your itemized deduction on your Schedule A. If you wait until January 2015, the itemized deduction (but not credit for the actual payment) will have to wait until NEXT tax season, or April 15, 2016!
9. Pay your Estimated Tax or Increase Withholding. Though not technically a "tax-savings", it will reduce the amount that is owed next April 15th. Often paying estimated tax of $500 or $1000 now (or increasing it by that amount), and paying it four times a year, will be better than trying to scrounge up $4-5000 in April. For the regular W-2 wage earner, increasing your withholding amount will accomplish the same goal. Just remember that if you increased your W-2 Withholding amount that it will stay at that amount until you tell your employer to reduce it. Come January 2015, you should probably revisit your withholding deduction on a new W-4.
10. Charity Giving: Money & Items. Giving to a legitimate charity is always a good moral idea, plus you can deduct it, if you do it by December 31st. Remember that you can put it on your credit card in December and it will be considered a 2014 donation even though you will not pay the credit card until January/February 2015. The other part of this is donating items such as clothing, appliances, and other household items. When you replace such items, donate them to a charitable foundation such as Goodwill or the Salvation Army. Track what you donated and the FMV (fair market value) of the item. Of course that FMV must be reasonable and fair. A 10 year old sofa that you paid $1000 for is not worth $800 now. The key: reasonable. One caveat: donation of an expensive item, such as a car, boat, RV, etc., must be appraised and listed separately on your tax return so the IRS knows what you are doing and why your deduction is over $600.
Hopefully you will look at these tips and it will help make your tax year 2014 slightly more bearable. As always, if you are uncertain of a situation, ask your tax preparer, CPA, or feel free to contact me at Bob@DanielAccounting.com or 740-881-1954.
Accounting Today. October 30, 2014. "Top 12 Year-End CPA Tax-Saving Tips". http://www.accountingtoday.com/gallery/Top-12-Year-End-Tax-Saving-Tips-CPAs-61129-1.html.
Craig, Glen. October 30, 2014. "9 Year End Tax Savings Tips". http://freefrombroke.com/9-year-end-tax-savings-tips/.
Grant Thornton LLP. October 30, 2014. Accounting Today: "10 Year-End Tax Tips". http://www.accountingtoday.com/gallery/10-year-end-tax-tips-72384-1.html.