As we approach the end of the year and the joyful celebrations of the holidays, there are a couple items to add to your holiday “to-do” lists. It’s important for you to take a few steps before Dec. 31st to reduce your tax burden and keep more of the money you’ve worked hard for all year.
First, schedule an appointment, so we can do a quick projection of your taxable income and calculate an estimate of your tax liability for 2014. Once we have your estimated tax bill, we can discuss the options available to you to increase your refund or reduce the taxes you owe. Here are some of the ways to reduce your tax liability before the end of the year:
Deductions and Contributions
Deductions are a way to offset income, and you can make charitable contributions until Dec. 31st. Just be sure you donate to a 501(c)3 charitable organization and get a receipt. All donations require a receipt from the charity to qualify as a tax deduction, so be sure to ask the organization for a copy. If it is a Maryland organization, you may be able to deduct an additional 50 percent on your Maryland state taxes. Ask the organization if your donation would qualify as a “Community Investment Tax Credit.” Non-cash donations such as clothes, books, and furniture need to have an estimated value assigned to them. You can use the Goodwill Valuation Guide to determine the value of your donations.
Contributions can also be used to offset income, including both contributions to a traditional IRA account as well as HSA accounts. One of the benefits of contributing to a traditional IRA account is that you have until April 15, 2015 to make the contribution for tax year 2014. With that benefit, it may pay to hold off on your IRA contribution until you have a clearer picture of your total tax liability.
Expenses and Taxes
If you are self-employed, pay your estimated quarterly taxes now. While you have until Jan. 15, 2015 to make the payment, you’ll pay a penalty if you pay late!
Total your expense receipts, so you are ahead of the game in preparation for completing your 2014 tax return. Having this information at your fingertips also helps you more accurately estimate your tax liability.
If your estimated tax bill is higher than you expected, try to defer income until 2015. While that sounds a bit counterintuitive, it’s called “income” tax for a reason. If the income is not received until next year, it won’t be taxed until 2016. While it’s very late in the game to take this step, you can consider delaying billing until the end of the month, so payment won’t be received until next year. If operating on a cash basis, income is taxed in the year it is received.
However, before taking that action, you’ll need to have a good idea of your anticipated tax bracket for 2015. It only makes sense to defer income if you anticipate being in the same (or lower) tax bracket next year. If you anticipate jumping into a higher tax bracket for 2015, then it makes more sense to accelerate income in what remains of 2014.
Filing 1099-Misc Forms
If you paid an independent contractor or freelancer at least $600 for services (or rents, prizes, awards, or other income payments), you must issue a Form 1099-MISC to that person. (Note: You do not need to issue 1099s for payments for personal purposes.)
While claiming the income is the onus of the recipient, as a business, you can be subjected to penalties for failure to issue a 1099-MISC. Those penalties range from $30.00 to $100.00 per form, depending on how long past the deadline you issue it.
The deadline for mailing 1099s to your vendors is Jan. 31st. However, the process isn’t as easy as simply downloading some blank forms, completing them, and issuing them to your vendors and independent contractors. The forms must be completed in triplicate, and you must then compile all of your 1099s and submit them to the IRS with a 1096 form before Feb. 28th.
The W-9 Solution
The W-9 form is a request for Taxpayer Identification Number and Certification. By requiring any of your independent contractors or freelancers (to whom you paid in excess of $600.00 a year) to complete a W-9, you will reduce some of the end-of-year headaches in filing 1099-MISC forms as you will have all of the necessary information collected.
Mark Your Calendar
Finally, if you find yourself scrambling or panicking with year-end looming, mark your calendar now for October 2015 to begin the process of preparing for year-end in 2015. The extra time you allow for the process improves your ability to strategize more effectively.