Year-End Strategies for Retirees to Trim 2014 Tax Tab

Despite the market volatility of late, you'll likely still end 2014 with gains in your nest egg -- as well as a bigger potential tax bill. If you spend the time, however, your year-end planning could trim the tribute you must pay to Uncle Sam.

Some experts expect that capital-gains tax bills will be higher in 2014 than in 2013. For several years, investors used carryover losses from the 2007-09 market downturn to offset profits taken in later years. But after a period of sustained market gains, "most people today are not sitting on losses of any substance," says Thomas Geraghty, a certified public accountant with Stonegate Wealth Management, in Oakland, N.J. With no losses to offset gains, you'll owe tax on gains from the sale of stocks and bonds to rebalance your taxable portfolio, say, or if your mutual funds distributed capital gains.

For the second year, wealthier investors will likely feel the biggest tax pain. Those with taxable incomes above $400,000 for singles and $450,000 for joint filers face a 39.6% ordinary-income tax rate and owe 20% on long-term capital gains and qualified dividends.

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Taxpayers with modified adjusted gross income that exceeds $200,000 for singles and $250,000 for joint filers now owe a 3.8% surtax on "net investment income." That includes interest, dividends, capital gains, annuity payments, rents and royalties. The tax applies to the smaller of net investment income or the amount by which modified AGI exceeds the threshold. (Modified AGI is AGI plus tax-exempt interest income.)

Investment maneuvers. Despite the general market upswing, there could be "downers" in your investment portfolio, says Mark Luscombe, principal federal tax analyst at CCH, a publisher of tax information. And with the sharp market decline in early fall, it's possible that the sale of some stocks that you bought not long ago may have generated some losses to offset gains of the winners.

Beyond harvesting losses, look for other strategies to keep modified AGI below the 3.8% surtax threshold. Even if the surtax is not an issue, these strategies will trim your tax tab. If you're selling land or a business, you can spread payments over several years with an installment sale. The self-employed could defer some billings until next year. Another potential maneuver: "If you can, arrange with your employer to defer a bonus until 2015," says Thomas Long, senior tax analyst at Thomson Reuters, a publisher of tax and business information.

If you're planning to give to charity, consider donating appreciated stock rather than selling the stock and giving cash. "That lets you bypass the step of paying tax on the appreciation," says Joyce Franklin, a certified public accountant at JLFranklin Wealth Planning, in Larkspur, Cal. You also get to deduct the full market value of the securities as long as you've held them for more than a year.

Giving appreciated stock to a parent or adult children can make sense, too, rather than selling stock to make a cash gift. If the recipient of the gift sells the stock, he or she may pay capital-gains taxes at a lower rate, says Geraghty. You can't deduct the gift, but less may go to the IRS. Taxpayers can give up to $14,000 per individual per year without filing a gift tax return.

Zero capital gains. Taxpayers in the 10% and 15% income tax brackets continue to benefit from the 0% federal rate for long-term capital gains. To qualify, your 2014 taxable income cannot exceed $36,900 for singles and $73,800 for joint filers.

Thomson Reuters' Long says that taxpayers can try to keep AGI within the 10% or 15% brackets by restricting IRA withdrawals to their required minimum distributions. Then they can "sell stocks to supplement RMD income and take advantage of the 0% rate for capital gains," he says. If you still need more income, you can take cash from taxable accounts -- which won't boost AGI.

The zero capital-gains rate only applies until your income pushes through the top of the 15% bracket. You'll pay the 15% capital-gains tax for profits that exceed the 15% bracket. And beware that although the gains may be tax free at the federal level, they will be included in your AGI, which could make more of your Social Security benefits taxable.

Roth conversions. This could be a good time to convert part of your traditional IRA to a Roth, Franklin says. Investors can get a better sense of their AGI in November and December, after most mutual funds distribute capital gains, interest and dividend income. "We then know how much wiggle room the client has left before hitting the top of the tax bracket," Franklin says. You must pay income tax on the amount of the conversion.

Franklin says taxpayers who are converting do need to take care that their modified AGI does not exceed the 3.8% surtax threshold. You also will trigger income-related premium surcharges for Medicare Part B and Part D once modified AGI exceeds $85,000 for individuals and $170,000 for joint filers.

You could ease the tax bite of a Roth conversion if you have big deductions, such as large medical expenses. If either spouse turns 65 before the end of the year, you can deduct any medical costs that exceed 7.5% of your AGI; the threshold is 10% for younger taxpayers.

Retirement plans. You can limit both AGI and taxable income by socking away more pretax money in your retirement plans. "Check your most recent pay stub to see if you're on track to maximize your 401(k)," Luscombe says. You have until your last paycheck in December to make 401(k) contributions and until next April 15 to contribute to a traditional IRA for 2014. Those 50 or older can contribute an extra $1,000 to an IRA, for a maximum of $6,500, and an extra $5,500 to a 401(k), for a maximum of $23,000.

Taxpayers who have a health savings account linked to a high-deductible health insurance policy should fully fund the HSA before year-end, Geraghty says. You can make a tax-deductible or pretax contribution of up to $3,300 for single coverage ($6,550 for a family), plus an extra $1,000 if you're 55 or older.

An HSA contribution also has long-term tax benefits, Geraghty says. "You can let the money sit there and it can grow tax free for 20 years," he says. You can withdraw the money without tax or penalty to pay for medical expenses.

IRA-to-charity maneuver. Congress has yet to approve an extension of the popular tax break that allows individuals 70 1/2 and older to directly transfer up to $100,000 from their IRA to charity -- and have the transfer count toward an RMD.

You could see if lawmakers decide to approve the maneuver, but don't wait too long. You should give your IRA custodian enough time -- by mid December -- to get your RMD and charitable donation paperwork in order.