The Clock is Ticking: Five Last-Minute Tax Strategies for Your Clientsby
Tick … tick … tick. The time for filing 2014 tax returns is running out. Although you may be scrambling to complete tax returns for clients, or they still may be collecting all the information you need, there are a few “11th hour” strategies that could save your clients valuable tax dollars.
Here are five common examples.
1. Contribute to an IRA. For many moderate-income clients, this is an easy way to cut taxes while saving for retirement. You can still claim an above-the-line deduction for the 2014 tax year for an individual retirement account (IRA) contribution as long as it is made by the tax return deadline. The maximum contribution is $5,500 ($6,500 if age 50 or older). However, the deduction is phased out for an active participant in an employer retirement plan, depending on modified adjusted gross income (AGI).
2. Go the SEP route. Similarly, higher-income clients who are self-employed can contribute to a Simplified Employee Pension (SEP) plan prior to the tax return due date. Even better, the contribution limits for SEPs are much higher than they are for IRAs. For the 2014 tax year, the limit for deductible contributions is the lesser of 25 percent of compensation, or $52,000. This above-the-line deduction reduces your AGI for various other tax return purposes.
3. Carry on with a carryover. If you had excess capital losses on your 2013 return, you can use those losses to offset income on your 2014 return. Capital losses may offset capital gains, plus up to $3,000 of highly taxed ordinary income. Along the same lines, you may have carried over an excess charitable deduction from 2013 that may offset 2014 tax liability. Be careful to check the previous returns of clients who are using your tax-preparation services for the first time.
4. Key in on home-office deductions. Self-employed individuals may overlook this deduction. Typically, you can deduct home-office expenses, including direct expenses and a portion of overall home expenses based on percentage of business use, if the home office is used regularly and exclusively as your principal place of business. If a client doesn’t have the necessary records, a simplified deduction of $5 per square foot of the home office may be claimed, up to a maximum of $1,500.
5. Get a head start on next year. If the IRS owes you money, you can pocket the refund and splurge on a luxury. But a better approach may be to apply the excess to your 2015 taxes, especially if you're required to make quarterly installment payments by April 15. Generally, you will owe an underpayment penalty for a tax year if your installments don't equal at least 890 percent of your current tax liability, or 100 percent of last year's liability (110 percent if your AGI exceeded $150,000).
Finally, if you need extra time to pull a return together, you can obtain an automatic six-month filing extension from the IRS – no questions asked – by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, before the tax return deadline. But the extension is only for filing, not payment, so you still must make a good-faith estimate of your taxes. Also, note that an extension will give you more time to contribute to an SEP for the 2014 tax year, but not for an IRA.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...