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As the year draws to a close, it’s a good time to review ways help minimize your tax burden. These year-end tax tips are great things to consider for helping reduce your tax bill or maximize your refund. Most of these must be completed by December 31, so don’t delay!
Disclaimer: I am not a lawyer or CPA and this is not legal advice. Always consult with your lawyer or accountant prior to making big decisions regarding your finances. The information provided here is simply for your consideration and we hope it gives you some food for thought!
Drum Roll Please…Here are the top 15 Year-End Tax Tips:
1. Accelerate Your Deductions
In some situations, it might be a good idea to pay tax-deductible expenses early in order to claim them on this year’s tax return. Some specific examples include:
- Making your January mortgage payment at the end of December
- Paying property taxes before the end of the year
- Making estimated state and local income tax payments for January in December
- Paying doctor or hospital bills by December 31
2. Watch for Alternative Minimum Tax (AMT)
Find out if you will be subject to the Alternative Minimum Tax (AMT). If so, some expenses that are deductible under the normal rules no longer apply. In this case, it might make sense to defer those expenses to next year. This makes the most sense if you think your income will be lower next year and you’ll no longer fall under the AMT.
3. Defer Your Income to Next Year
Since you only pay tax on income in the year it is received, if you can defer receiving some of your income until January, you can avoid paying the taxes on it until next year. This usually isn’t an option for salaried wages, but sometimes companies will postpone bonus payments to the following year.
If you’re self-employed, delaying billings until the end of the year can help ensure you won’t receive payment until next year, reducing this year’s tax bill.
4. Defer Capital Gains
If you’re selling a property close to the end of the year, you can defer the capital gains to next year if you can move the closing date of the sale to January instead of December. Then you’ll pay taxes on the capital gains with next year’s tax return in about 16 months instead of with this year’s return in a few months.
5. Sell Losing Investments
If you have losing stocks or mutual funds you’ve been wanting to get rid of, sell them before the end of the year and you can use the losses to offset any taxable gains you have realized during the year. You can also use up to $3000 of investment losses to offset other taxable income.
6. Contribute to Retirement Accounts
Make sure you’re contributing the maximum amount to your employer-sponsored 401(k) plan to defer taxes on that income for as long as possible. Some employers may allow you to make a one-time “catch up” contribution to your plan at the end of the year.
If you’ve already maxed out any employer-sponsored plan, consider contributing the maximum amount to an IRA. Although you have until April 15 to make contributions to your IRA and still deduct it from this year’s income, you must open the IRA account prior to December 31.
If you do your own taxes, using a product like TurboTax has tools to help calculate the amount you’ll save on taxes by contributing more to a retirement plan. This can really help with your tax planning for next year.
7. Flexible Spending Accounts
If you have a Flexible Spending Account (FSA), make sure to check on it before the end of the year. If you still have a balance in the account, you’ll need to spend it before the end of the year or risk forfeiting it. Some employers offer a grace period that allows you to use this year’s money in the account until as late as March of next year.
8. Watch Out for the Kiddie Tax
The so-called “Kiddie Tax” taxes a child’s investment income above a certain amount ($2,100 for 2015) at the parents’ tax rate. This applies for any children under the age of 19 and for some student up to age 24. Instead of paying the zero percent rate applicable to most childrens’ investments, you could be taxed at the 15% capital gains rate.
9. Add Energy Efficient Improvements to Your Home
Get a tax credit for up to 30% of the costs of approved energy efficient improvements to your home as long as the improvements are made by December 31. For more information on the specifics, see IRS Tax Tip 2015-38.
10. Group Medical Expenses
Medical expenses generally must exceed 10% of your adjusted gross income before they are tax deductible. If you can group some of those expenses into a single year, you have a better chance of hitting that 10% mark. Consider visiting the dentist, filling prescriptions, and paying other medical expenses in the year that will be most advantageous to you. If it will help your medical expenses exceed 10% this year, pay them before December 31. If not, consider waiting until next year to pay these expenses.
11. Open a Health Savings Account (HSA)
HSAs provide triple savings because contributions are tax deductible, earnings grow tax free, and withdrawals for qualified medical expenses are tax free. See IRS Publication 969 for current rules on HSAs and to find out if you’re eligible.
12. Make Charitable Contributions
Charitable contributions made before December 31 are deductible on this year’s tax return. Consider a year-end cash or goods donation, but make sure to get a receipt from the charity or it doesn’t count. You can save hundreds of dollars by donating gently used clothing, books, and other household items to a place like Goodwill. Use the “ItsDeductible” tool built into TurboTax to accurately estimate and claim the value of such items.
13. Contribute to an Education Plan
You may gain some state income tax benefits by contributing to a 529 college savings plan for a child or grandchild. Contributions are tax-deductible and distributions for qualified education expenses are tax-free.
14. Adjust Tax Withholdings
The end of the year is a good time to consider adjusting your income-tax withholding to match your taxable income. Many people pay too much to the IRS by having too much withheld each paycheck. This results in a sizable tax refund, but it is essentially a free loan from you to the IRS. Consider using a tax withholding calculator to determine your estimated tax burden, then make adjustments with your employer to make sure your withholdings are not too much over or under what you think you’ll owe in taxes.
15. IRA Rollovers
If you’re in a lower tax bracket this year, it might be a good time to consider a Traditional-to-Roth IRA rollover. This will convert your Traditional IRA to a Roth, which will cause you to pay taxes on the rollover amount now. The benefit is your account will now grow tax-free and all future distributions are also tax-free.
If you already elected to make a Traditional-to-Roth IRA Rollover earlier this year, examine your account. If the value of the account went down, you can reverse the conversion up until your extended filing deadline. That will allow you to perform a conversion later (with a lower amount in the account) and pay less on taxes.
And there you have it, our top 15 year-end tax tips. We hope these ideas give you something to think about as tax time comes around. If you’d like to share any other good tax tips, please leave a comment below and other readers can use them, too.
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Nate Phillips has been using Quicken and TurboTax for over 20 years. He has spent part of that time as a Quicken beta tester, helping identify bugs and annoyances with Quicken updates before they are released. Nate holds a master’s degree in Computer Science and has numerous technology certifications.