• Print
  • Default text size A
  • Larger text size A
  • Largest text size A

How to lower your tax bill

  • By Kelly Phillips Erb,
  • Money Magazine
  • – 02/03/2014
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.

Every year Americans scramble to shave dollars off their federal tax bill in December -- then miss out on a huge opportunity come January. The beginning of the year is also a great time to strategize, since you can reap the benefits of any changes you make for a full 12 months ahead.

New Year's tax planning can be especially profitable for high earners looking to offset the sting of 2013's tax code changes. These include, for couples filing jointly with modified adjusted gross income above $250,000, a new 0.9% tax on wages above that amount, plus 3.8% on some investment income; and for couples over $300,000, new caps on exemptions and deductions.

No matter your income, however, these tips can help you reduce your 2014 burden.

Defer more of your income

Most people with access to a 401(k) don't max out, even though it's the easiest way to cut your taxes. You can put away $17,500 pretax in 2014, plus $5,500 if you're 50 or older. Upping your yearly savings by $5,000 takes $1,400 off your tax bill in the 28% bracket, and if you start in January, you pare only $138 off a biweekly paycheck, says Philadelphia accountant Scott Kregel.

Already stashing the most possible? Families with certain high-deductible health insurance can sock away $6,550 pretax in a health savings account, plus $1,000 more at 55. (Funds not used for medical costs can be withdrawn penalty-free after 65.)

You may also be eligible for a deduction on a traditional IRA, up to $5,500, or $6,500 if you're 50-plus.

Got side income? You could put 25% of it, up to $52,000, in a SEP IRA.

Will a traditional IRA lower your tax bill?

It depends on whether you and your spouse have retirement plans at work. Here's what you can deduct if you're a married couple and file jointly.

Access to workplace plan? If your AGI is less than... You can deduct...
Neither spouse N/A Max
Both spouses $96,001 Max
One spouse: Spouse who has the plan $96,001 Max
$116,000 Partial
$116,000 Partial
One spouse: Spouse without the plan $181,001 Max
$191,000 Partial

AGI refers to household adjusted gross income. SOURCE: IRS

Avoid the new investment tax

That 3.8% investment tax applies to unearned income like interest, dividends, capital gains, and rent, and kicks in for singles whose modified AGI exceeds $200,000 and $250,000 for marrieds filing jointly.

If you'll pass the threshold -- if you earn a lot, say, and expect gains from a home sale -- spread any income you can into next year or beyond, says San Diego CPA Melody Thornton. (For example, postpone exercising options.)

For new investments outside tax-deferred accounts, Joseph DiMaio of West Capital Management in Philadelphia suggests laddering high-quality intermediate-term munis. Interest on municipal bonds is generally federal-tax-free, and "prices on intermediate munis have come down, so their tax-equivalent yields are higher," he says.

Keep better records

Write-offs for business expenses, charitable donations, and medical bills require you to have documentation at tax time. Start the year by implementing a system that allows you to record receipts as you go, so you don't miss any. (That's especially key for medical costs, since the threshold for deductibility increased in 2013 from 7.5% of AGI to 10% for those under 65.)

Greg LaFollette, VP of product strategy at CPA2Biz, likes Shoeboxed.com, a free site and app that lets you upload receipts and categorize them. "At tax time you simply copy the folder and deliver it to your accountant," he says. Better than the actual shoebox you were using before.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
™ and © 2014 Cable News Network and Time Inc. and/or their affiliated companies. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Links provided by Fidelity Brokerage Services

fidelity-fbs-iconThese links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are seperate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Published by Fidelity Interactive Content Services

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
fidelity-fbs-iconThese links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are seperate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.