Six Tax Moves To Make Before Year End
The upcoming tax season is expected to be especially challenging. A little planning now can help you lower your tax bill come April 15th. Here are 6 ways to minimize the bill, but always consult your tax advisor first before taking action:
- Accelerate or postpone discretionary medical expenses when feasible. The new health law reduced the amount of unreimbursed medical expenses that you can claim when itemizing the deductions. Taxpayers under the age of 65 can claim deductions for expenses that exceed 10 percent of their adjusted gross income. If you are age 65 and older you may still deduct total medical expenses that exceed 7.5% of your adjusted gross temporarily but that ends in 2017. If your expenses are right on the borderline, you may want to take care of any pending medical services and appointments now, so you can boost your deduction for 2014. If your expenses were too low to claim the medical expense deduction for 2014, consider postponing discretionary services a few weeks into the New Year.
- Accelerate retirement account distributions when you have excess deductions. If your standard deduction will exceed your taxable income this year, consider withdrawing a little more retirement funds if you will need them this year. Doing so when you have a low or even a zero tax rate will potentially help you avoid paying more in the future when your deductions are lower or taxes rates are higher.
- Use distributions from Roth accounts to minimize taxation of Social Security benefits. Unlike distributions from traditional IRAs and 401(k)s, qualified distributions from Roth IRAs — those taken when you are over 59½ and the contributions were made more than five years ago — will not subject your Social Security benefits to taxation. To minimize taxation of your Social Security benefits, consider taking distribution from your Roth IRA, and let your Traditional IRA or 401(k) grow until you reach age 70 and a half. Once you reach that age, distributions of Traditional IRAs and 401(k)s must start by April 1 of the year following.
- Have health insurance coverage. If you are under the age of 65 and didn't have health insurance for some or part of 2014 you may have to pay a tax penalty. For people who don't have Medicare or Medicaid, the penalty for not having coverage is the greater of 1% of your annual income, or $95. The penalty is rising in 2015 to the greater of 2% or $325 per person.
- Claim a health law exemption if under 65 and uninsured. If you did not have health coverage in some or all of 2014, you might qualify for an exemption. As of September 30, 2014, the Healthcare.gov website lists 22 of them here. These include reasons such as the lowest-priced coverage available would have cost more than 8% of your household income, or your individual plan was cancelled and you believe other Marketplace plans are unaffordable. To claim the exemption you can apply now. Be sure to use the right form, found on Healthcare.gov. You may also wait to claim the exemptions when you fill out your 2014 tax return, due April 15, 2015.
- If you are under age 65 and uninsured, be sure to claim the correct income if you purchase health insurance through HealthCare.gov or a state health insurance exchange. When you purchase health insurance through the federal or a state health insurance exchange, you may qualify for a subsidy that helps lower the costs of your premiums. In reality that subsidy is an advance tax credit based on income. If you received a subsidy in 2014, and your income is higher than you estimated, you could wind up having to pay some or even all of it back at tax time. If your income has gone up, contact HealthCare.gov or your state insurance exchange to update your information. Coverage for 2014 ends December 31, 2014. Open enrollment for 2015 is now underway and runs through February 15, 2015.