THE TOP 5 THINGS YOUR ACCOUNTANT WOULD SAY

“ If you would just talk to them calmly in November”

INSTEAD of PANICKED IN APRIL.

I know that thinking about next years taxes in November is met with the same disgust as Christmas decorations before Halloween. Still if you want your accountant to do more than just keep score on this years 1040 you have to do something different before New Years Day.

As a favor to you and your holiday spirit here is a quick review of what they would say...

ONE: Beware End-of-Year Mutual Fund Purchases

Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income.

That's not how it works, though. Yes, you'd get the payout, but at the time of the payout, the share price falls by exactly the same amount. If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price.

But the IRS doesn't see it that way. You have to report the payouts as income on your 2014 return—and pay taxes on them—even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)

Before you buy shares for a non-retirement account in December, check the fund company's Web site to find out exactly when the dividend will be paid.

TWO: Give Really Big to Charity

If you plan to make a significant gift to charity this year, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year. Doing so boosts the savings on your tax return. Your charitable-contribution deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.

If your favorite cause can't accept donations of appreciated securities, consider opening a donor-advised fund instead. The fund administrator will sell the securities for you and add the proceeds to your account. You can deduct the value of the securities on your 2014 tax return and decide later where you want to donate the money.

THREE: Penalty-Proof Your Return

If you expect that you'll owe money when you file your 2014 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now.

You needn't pay every penny of the tax you expect to owe. As long as you prepay 90% of this year's tax bill, you're off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year's tax liability. However, note that if your 2013 adjusted gross income topped $150,000, you'll have to prepay 110% of last year's tax liability to avoid a penalty.

Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2014 return, no matter how much you actually owe when you file your return.

If you have both wage and consulting income and expect to owe money on your tax return, you'll do better by boosting the taxes withheld from your last few paychecks rather than trying to make up the shortfall with your final estimated quarterly payment, due January 15, 2015.

FOUR: Prepay Deductible Expenditures

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2014 write-offs makes sense if you expect to be in the same or lower tax bracket next year.

Accelerating the house payment that is due in January will give you 13 month’s worth of deductible interest in 2014 (unless you’ve already been following the prepayment drill). You can use the same strategy with a vacation home.

Prepaying state and local income and property taxes that are due early next year can reduced your 2014 federal income tax bill, because your total itemized deductions will be that much higher.

Miscellaneous deductions for investment expenses, job-hunting expenses, fees for tax preparation and advice, and un-reimbursed employee business expenses count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the 2% of AGI hurdle and getting some tax savings.

FIVE: Prepay Medical expenses

Medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be 65 or older as of year end, the deduction threshold is a more-manageable 7.5% of AGI.

The prepayment strategy can backfire if you will owe the alternative minimum tax (AMT) for this year. Solution: Ask your tax adviser if you’re in the AMT mode before prepaying taxes or miscellaneous deduction items.

You’ll feel happier at the end of the year if you’re able to cut your tax bill.

Yours Truly, Steve