1. Postpone Income
If you think you will be in a lower tax bracket next year, consider deferring some of your income to 2016 to keep tax bills lower in 2015.
2. Pay Deductible Expenses Before December 31
Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductible expenses this year (you can only deduct expenses that reach a particular percentage of your income). Don’t employ this strategy if you expect to be in a higher tax bracket in 2016 – in that case, the deductions will be more valuable to you next year.
3. Fund Retirement
Investing in your own retirement is a good way to reduce your taxable income.
Contribute to your retirement accounts by December 31 to count for 2015. You have until April 18, 2016, to set up a new IRA or add money to an existing IRA and still have it count for 2015. Beginning in 2015, you may roll over only one IRA account per 12-month period.
Many employers match worker contributions up to a certain figure. Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed. If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
With a tax-deferred plan like an IRA, once you hit age 70 1/2 you must take out some money every year. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the Required Minimum Distribution (RMD) not withdrawn. You can also donate your RMD directly to charity and avoid paying income taxes on the withdrawal.
4. Charitable Giving
Charitable contributions, along with other deductions, should be timed so as to occur in a year in which you will be in a higher marginal tax bracket. Only contributions actually made prior to year end are deductible.
Remember you must itemize your deductions to get a write-off, and the organization must be a qualified charity. Get your check in the mail by December 31 or consider using a credit card. Make sure you have a receipt, which can be a cancelled check or your credit-card statement.
5. Harvest Your Losses
A key year-end strategy is called “loss harvesting.” This involves selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
Those who suffered more losses than gains may be able to reduce their taxable incomes by up to $3,000, with additional losses carrying over to future years. You can carry over losses year after year for as long as you live.
Remember to avoid a “wash sale” – wait at least 31 days after the sale to buy the same security.
If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss in 2015. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless.
6. Part with Investment Gainers
If you would rather pay capital gains tax in 2016, then wait until January to sell winning stocks, bonds, or mutual funds. However, if you donate these gainers directly to a charity in 2015, you can enjoy two tax breaks. You won’t owe any taxes on your capital gains. And you can deduct the full market value of the investment on your 2015 return.
7. Check Your Flexible Spending Accounts
If you have a flexible spending account (FSA) for health care expenses, and you haven’t used all the money in it you will need to use the bulk of it before the end of the year.
Check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2015 set-aside money in early 2016. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
8. Funding 529 College Savings Plans
Most states, offer residents some kind of income-tax deduction for contributions to their 529 plan as long as you fund the account by December 31. However, you cannot deduct these contributions on your federal return. Consider funding 529 plans to apply 2015 annual gift tax exclusion treatment to the contributions.
9. Gift Tax Exclusion
Transferring wealth (cash, securities or other property) directly to friends or relatives doesn’t save income tax but does allow you to take advantage of the gift tax exclusion. The IRS permits filers to give $14,000 (or $28,000 for a married couple) to another person each year without reducing the payer’s unified credit. Such a gift could remove the value of the gifted asset, plus future appreciation, from your estate.
10. Beware of the Alternative Minimum Tax
Review your circumstances with your tax advisor to see if you may be exposed by AMT in 2015.
Sometimes accelerating tax deductions can cost you money. This is a year-end issue because certain expenses that are deductible under the regular rules are not deductible under the AMT. There’s a good chance you will be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, exercised incentive stock options, or recognized a large capital gain this year.
Schedule your consultation today!
As always, year-end tax planning must take into account each taxpayer’s particular situation and goals. Call us today, and schedule your consultation before year end to devise a tax-saving plan that most effectively meets your needs.
Merry Christmas and a Happy New Year to you and yours!
RDS Financial Services