Thursday, November 6, 2014

Five Tax-Shaving Strategies for the Next 60 Days

Richard E Brand for Profitable Investing writes: It's that time of year again. The clock is ticking down on 2014, and on December 31 at midnight, your last opportunity to save on this year's tax bill will expire. Don't be discouraged, though. There's still plenty of time to act. Here are five easy strategies you can put to work right now, with the potential to shave off hundreds or even thousands of dollars in taxes before the band strikes up Auld Lang Syne on New Year's Eve.

Tax Shaver #1: Top Off Your Retirement Contributions
This may be the simplest piece of tax advice you'll ever hear, and the most often repeated. Yet, according to a recent survey by Capital One Sharebuilder, nearly a quarter of Americans in the workforce aren't setting aside anything for retirement.
More's the pity, because Uncle Sam dangles some pretty enticing carrots for people who want to build up a retirement fund. If your employer sponsors a 401(k) plan, you can kick in as much as $17,500 this year if you're under 50, and $23,000 if you're over 50. Since 401(k) contributions chip away at your adjustable gross income, a worker over 50 in the top federal tax bracket can save more than $9,000 a year by shoveling the maximum amount into a 401(k).
Many people don't realize it, but you can set up an IRA and contribute to it even if you already have a 401(k) at work. For 2014, you can funnel up to $5,500 into either a Traditional or a Roth IRA ($6,500 if you're age 50 or older). With a Traditional IRA, your contributions are tax deductible, but your withdrawals are taxed as ordinary income. With a Roth, there's no tax deduction on the way in, but no taxes on the way out.
The government does impose income limits for contributing to a deductible Traditional IRA or a Roth. For traditional IRAs, the deduction phases out once your "modified adjusted gross income" climbs above $60,000 ($96,000 for couples). For Roths, the phaseout begins at $114,000 ($181,000 for couples). You can check all the fine print in IRS Publication 590.
A final incentive: Most leading discount brokers, such as Fidelity, Schwab and TD Ameritrade, charge no setup or annual maintenance fee for IRAs. What are you waiting for?

Tax Shaver #2: Offset Your Capital Gains with Losses

I don't know about you, but I've tried to avoid harvesting a lot of capital gains here in 2014. It doesn't make much sense to ring up a taxable gain when you think market prices are probably headed higher. Still, many of us will face a big tax tab when Kinder Morgan Inc. (NYSE: KMI) absorbs Kinder Morgan Energy Partners(NYSE: KMP), a member of our Incredible Dividend Machine. The transaction, considered a sale for tax purposes, is expected to close before year-end.
To minimize the bite when you've got a large gain, book some losses. The tax code even lets you use up to $3,000 in net capital losses per year (losses in excess of gains) to shrink your ordinary income.
Where will find losses to offset your gains? Some may be obvious, such as when you see a minus sign on your monthly brokerage statement. Others may take a little sleuthing. I noticed, for example, that I own a municipal bond fund that has generated a solid positive return for me over the past 10 years (the account is worth much more than my original investment). Yet the fund shows a capital loss for tax purposes. I plan to swap to a similar fund, run by the same manager, before December 31 to capture the tax loss.
Often, a tax swap gives you a chance to upgrade the quality of your investment. By switching to a stronger company in the same industry, or a better-managed fund in the same sector, you can put yourself on a path to improved returns. For a couple of suggested swaps in the bond area, see the box on the next page.

Tax Shaver #3: Make a Charitable Gift of Stock

If you've got a heart for charity, you can make your dollars go further by giving appreciated assets—such as stock that has risen in value—rather than cash. As long as you've held the asset at least a year and a day, you can take a deduction for the current market value, rather than your original purchase price. (Note, however: Master limited partnerships don't qualify for this generous treatment.)
What if you're not sure just yet which charities you want to help? Open an account with the charitable gift funds sponsored by Fidelity ( or Schwab ( Both of these funds will let you start with cash or securities valued at $5,000 or more. You get an immediate tax deduction when you establish the account, and you can dribble out the gifts at your leisure. Meanwhile, your money will be invested in a mutual fund (or mix of funds) of your choice.

Tax Shaver #4: Make Tax-Free Gifts to Loved Ones

Enid and I have made liberal use of this technique in recent years. Under current law, each of us can give up to $14,000 a year to each beneficiary without eating into our lifetime exemption from estate or gift tax.
If you've got a child or grandchild you wish to help on the road to higher education, consider opening a 529 college savings account. The same gift-tax savings I mentioned above apply here. In addition, for really big givers, our dear Uncle allows you to bunch together up to five years' worth of gift-tax exemptions.
Thus, a husband and wife could channel as much as $140,000 into each of their children's 529 accounts, without affecting the lifetime exemption. Any earnings accumulate tax-free inside the account, and there's no tax on withdrawals for legitimate educational expenses (tuition, fees, room and board, books, etc.).
Many states offer good 529 programs. One of my favorites is the TD Ameritrade plan, sponsored by the state of Nebraska. (You don't need to be a Nebraska resident to qualify.) TDA accepts accounts of any size. No annual maintenance fee.
Best of all, the TDA plan gives you wide investment flexibility. You can choose among four age-based investment options; three "static" options that invest in a fixed blend of mutual funds; and 17 individual stock and bond funds. Something in this pot is sure to please even the fussiest investor's taste!

Tax Shaver #5: Boost Your Business Writeoffs

If you own a business, you can pull any number of strings to reduce your taxes. For instance, you can contribute up to $6,550 to a Health Savings Account for your family ($7,550 if you're 55 or older). That sum comes "off the top" of your adjusted gross income, so it's one of the most efficient tax breaks available.
Thinking about purchasing new office equipment? Do it this year, and with so-called Section 179 expensing you can write off the entire cost up to $25,000. The Code also lets you deduct up to $5,000 in organizational expenses for a start-up business as long as the business begins operations this year. Because this deduction phases out once your expenses top $50,000, you'll want to plan your spending so that you don't exceed the limit this year.
In short, this is the season to nail down tax benefits you may have overlooked. By early December, the rush will be on. Get in touch with your tax advisor now and find out which of the breaks I've mentioned here will deliver best results for you.
Richard E. Band is the newsletter world's #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has quintupled in value since its inception in 1990, while taking far less risk than the popular stock market index funds.  Click here to visit the website of Richard E. Brand.


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