With the end of 2014 drawing ever nearer, my wife and I have begun our yearly ritual of figuring out how we can save on our taxes. Check out these easy tricks we annually employ. Kids, DO try this at home!
Donate all the garbage. I couldn’t believe how many items in my household we literally didn’t touch, not even once, in the whole of 2014. Things like that are immediate candidates for donation. Things that fall into this category could be electronics, furniture, books, clothes, kitchenware, bedroom sets, used toothbrushes, etc. Ok, maybe not used toothbrushes, but just about anything you don’t use, you can find a better home for, and get a tax deduction for doing so. In some years, we’ve gotten $10,000 worth of deductions.
Donate appreciated assets. If you were to give a monetary donation to your place of worship or a charity you care deeply about, don’t give cash, give appreciated assets. What I usually do is examine all my securities such as stocks and mutual funds, and give away the one that has the highest appreciation. This way, I avoid the capital gain tax while still getting the tax deduction for the full amount donated.
Set up a donor advised fund. If you made a lot of money this year, and you are charitably inclined but you don’t yet know where to donate your money, it may make sense to set up a donor advised fund controlled by yourself. When you give money to your donor advised fund, you get the tax deduction right away, and you can decide which charity to allocate the money to later on.
Contribute to your 401k. If you have cash sitting around collecting dust, you might as well contribute to your 401k, which has a limit of $17,500 if you are under 50, plus an additional $5,500 if you are over.
Create a Defined Benefit Plan. If you have your own business and you made shit loads of money in 2014, a DBP might be a good way for you to salt away a good chunk tax deferred. By a good chunk I mean $150k to $200k depending on your situation. Usually a DBP makes economic sense when you only have a few employees, and they are a lot younger than you.
Open a 529 plan account. If you have kids, there is no reason not to open a 529 plan account. You get to save for your kids’ college education and save state taxes all at once. Take myself for example, I have two boys and one wife. Therefore I can open 4 Maryland 529 plan accounts. Each account has a state tax deductible limit of $2,500. So I can put aside $10,000 state-tax deductible. If you live in Virginia, you are luckier, the tax deductible limit is $4,000 per parent per kid.
Fund your Flex Spending Account. If you employer offers flex spending as a benefit then you should definitely use it. You can put aside $5,000 for healthcare and another $5,000 for dependent care pre-tax. That’s huge!
Make a baby. Naaaah. There are exemptions, deductions and tax credits associated with a baby, but I am afraid it’s too late for 2014 if you have not started yet.
If you want to find out how I can help you, schedule a Discovery review with me. If you are not ready, you can still get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.