It’s that time of the year. Before you know it, April 15 will be around the corner. While taxes are not due until April 15, there are many tax planning strategies that have a December 31 cut-off.
Before you start holiday shopping, get your tax affairs in order. Make these 8 year-end tax moves before it’s too late
1. Income Smoothing
The top tax rate is 39.6% on taxable income of more than $406,750 for single taxpayers; $457,600 for married couples filing joint returns ($228,800 if filing separately); and $432,200 for head-of-household taxpayers. Keep an eye out for the income that will push you over into a higher tax bracket.
The goal is to smooth income over a longer period of time in order to ease the tax pain. Corporations do this all the time in the form of deferred revenue.
For e.g. you can ask your boss to hold your bonus until January. For self-employed individuals, consider sending out invoices in 2016 for the jobs completed in December.
2. Add to your 401(k)
This is a no-brainer year-end tax move and one of the best ways to reduce income before taxes. Doesn’t matter if you are in high or low tax bracket. Put as much money as you can into your company’s 401(k) or retirement savings plan. By doing this, you are reducing the amount of money IRS can tax you on.
If your employer offers a match, many do, then you are leaving free money on the table by not maxing out on your 401(k).
3. Take advantage of FSA accounts
The medical flexible spending account, or FSA, is a seldom used workplace benefit. For 2015 (and 2016) you are allowed to contribute up to $2,550 to an FSA account. You still have time, just talk to your employer.
Similar to 401(k) plans, contributions to FSA are before taxes, reducing your taxable income. But unlike 401(k), money in your FSA account has a caveat – use it or lose it.
Don’t procrastinate, use your FSA funds to pay for qualified medical expenses not covered by your health plan – co-pays, vision, and dental care.
4. Tax loss harvesting
Head over to your online brokerage and take a peek in your taxable accounts. See losses? Good, I would be surprised if you didn’t. It’s time to sell those securities that have lost value. These are your Capital losses and can be used to offset any capital gains.
Chances are, you have more losses than gains. But don’t sweat. Though there’s a limit of $3,000, you can carry over losses to future years. Remember, you can use $3,000 loss to offset your ordinary income and this can come in handy, especially you are in the high-income bracket facing the 3.8% Net Investment Income Tax.
5. Pay deductible interest/tax bills
This might not be an option if you are cash strapped but if you do have some leeway, consider paying bills that allow you to deduct the interest/tax. For homeowners, that’s mortgage interest and property tax.
Renewing car registration in January, pay it now in December. Have student loans? Make the January payment in December.
6. Open up an IRA account
If for some reason you can’t max out on your 401(k) or your employer doesn’t offer it, open up an IRA account. For 2015, the limit is $5,500 ($6,500 if you’re age 50 or older).
If you are maxed out on your 401(k), you might not get the entire $5,500 deduction to reduce your AGI but it’s still a good deal because the money grows tax-free.
You don’t need to do this by the New Year’s day, the deadline is April 15, 2016.
7. Donate to charities
I know you have a long list of holiday gifts that you need to buy. However, consider donating some of the holiday cash. You will feel better when you donate and ecstatic when you see how much the donation saved you in taxes.
Besides giving out cash, consider donating stuff around the house – household goods and clothes. Have a clunker sitting in the garage? It’s time to donate.
Donating to charity is one of the best year-end tax moves.
8. Pay college costs early
If you are starting college in Spring or continuing college, take care Spring tuition before year end to take advantage of this year-end tax move. This way, you can max out on the American Opportunity Tax Credit your 2015 tax return.
The American Opportunity credit is worth up to $2,500 with up to 40% of the new credit refundable. Even if you don’t owe any taxes, you could still get $1,000 back as a tax refund.
Most expenses such as tuition, books, supplies etc. are eligible expenses under the American Opportunity credit.