Wouldn’t it be great if you had a device that could direct you into tax savings before you say goodbye to 2014. Exactly, well here’s what you’ve been looking for – a GPS. In this case, GPS stands for Give, Pay, Spend, and it’s those three simple actions that will help you lower your taxable income. Here’s how:
GIVE things away. Individuals who itemize deductions on their federal tax return, may be able to claim a charitable deduction when they donate to qualified charities. The IRS allows taxpayers to deduct the fair market value of clothing, shoes, household goods and more. Charities such as the Salvation Army and Goodwill offer value guides to help determine the fair market value of donated items. It’s important to get a receipt as a record of the contribution. The receipt should include the name of the charity and the date of donation. You could also use a bank record, a credit card statement or a pay stub, if your gift was given via payroll deduction. For gifts of $250 or more, you must have an acknowledgment from the charity. If the donation exceeds $500, you will need to complete Form 8283 and file it on your tax return. Gifts charged to your credit card before year end count for 2014, even if you don’t pay the bill until 2015. Also, a check will count for 2014 as long as it goes into the mail in 2014.
PAY your 401K. A retirement account offers a perfect tool to reduce taxable income. It’s wise, then, to max out contributions before year’s end, if you can. The deductible amount for a contribution to a traditional IRA is up to $5,500 per person, and up to $6,500 per person if you’re 50 or older. In 2014, a married couple filing jointly whose modified adjusted gross income was more than $96,000 but less than $116,000 could take a partial deduction for a traditional IRA. The same goes for single taxpayers (including head of household filers) making more than $60,000 but less than $70,000. If you’re self-employed, you can set up an Employee Pension plan and contribute the lesser amount of up to 20% of your income or $52,000 before April 15, 2015.
SPEND your FSA. Many companies require their employees to clear out their Flexible Spending Accounts by the end of the year. Even if a company allows employees to carry over money to 2015, it can’t allow more than $500. That’s the limit set by the Treasury Department. It’s important, then, to review FSAs and to spend them down. Over-the-counter medicines no longer are allowable expenses, but hearing aids, eyeglasses, contact lenses, crutches, dentures and lots of other medical items are. Medical and dental expenses paid with you FSA cannot be deducted from your taxes because FSAs often are tax-free.
It can’t hurt to check in with your tax adviser to learn even more ways to lower your taxable income before the calendar hits January 1.