Q. I sold some stock in early 2014 and I know I will owe taxes on that. I haven’t set money aside so I’m wondering if there are things I can do before the year is over to lower my overall tax bill.
A. It’s not too late to make some moves.
First, you should confirm what type of gain you have on the sale of your stock.
“Short-term gains are taxed at the ordinary income tax rate, which is usually less favorable for most people,” said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette. “If you have a long-term capital gain, depending on your filing status and income level, your tax rate on the gain could be as low as zero.”
Maye said if the gain from the sale of stock is short-term or you don’t qualify for the zero long-term capital gains rate, you might want to consider tax loss harvesting to offset the gains you realized earlier in the year.
Tax loss harvesting is nothing more than selling some of the investment losers to offset gains you have already realized, Maye said.
“To do so, you would review your taxable brokerage/investment accounts and see if you have any unrealized losses,” he said. “If you use this strategy don’t forget about the wash sales rules. A loss will be disallowed if you buy the same security within a certain window before and after you sale at a loss.”
The loss can offset up to $3,000 of ordinary income a year.
You could also consider accelerating deductions, Maye said, but you have to be careful, particularly if you are in the dreaded AMT zone. (For more on Alternative Minimum Tax, or AMT, click here.)
“Pre-paying state income taxes in December typically leads to a bigger itemized deduction, thereby reducing federal taxes,” Maye said, noting that those at risk of AMT could entirely wipe out the potential benefit.
You can also look at whatever income you’re expecting for the rest of the year, and see if you can postpone any so that you’re paid in 2015, said Gail Rosen, a Martinsville-based certified public accountant.
You can also accelerate deductible expenses.
“I realize you are short of cash, so you can consider using a credit card to pay deductible expenses before the end of the year,” Rosen said. “Doing so will increase you 2014 deductions even if you do not pay your credit card bill until after the end of the year.”
She gives that tip with caution, and says you should only do this if the costs are ones have in 2015 anyway. Don’t just make purchases to get a deduction.
You can also do some house cleaning.
“You can consider cleaning out your closets and donating any items to a qualified charity that is in good used condition or better,” Rosen said. “You get a tax deduction at the lower of fair market value or cost.”
To benefit, you need to itemize — not take the standard deduction — and you must hold on to all your receipts.
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