Quick Tips For Lower Taxes
Planning out your end of year financial moves could make all the difference in the world come April 15th. Look at your finances and consider putting one of these ideas into your playbook for lower taxes and an easier mind.
Remember, December 31st is your deadline!
Defer your income
Income is taxed in the year it is received – but why pay tax today if you can pay it tomorrow instead?
It’s tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year – as long as it is standard practice in your company to pay year-end bonuses the following year.
If you are self-employed or do freelance or consulting work, you have more leeway. Delaying billings until late December, for example, can ensure that you won’t receive payment until the next year.
Whether you are employed or self-employed, you can also defer income by taking capital gains in 2017 instead of in 2016.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that’s likely, you may want to accelerate income into 2016 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
Take some last-minute tax deductions
Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the timing. You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash. Better yet, as long as you’ve owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.)
Other expenses you can accelerate include an estimated state income tax bill due January 15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up deductions could be a blunder if you’re subject to the alternative minimum tax, as discussed below.)
Make sure you’ll be itemizing for 2016 rather than claiming the standard tax deduction. Unless the total of your qualifying expenses exceeds $6,300 if you are single, or $12,600 if you’re married filing a joint return, itemizing would be a mistake.
If you’re on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end planning stresses pushing as many deductible expenses as possible into the following year when they’ll have more value.
Beware of the Alternative Minimum Tax
Sometimes accelerating tax deductions can cost you money… if you’re already in the alternative minimum tax (AMT) or if you inadvertently trigger it.
Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT. State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2016, don’t pay the installments that are due in January 2017 in December 2016.
Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” –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.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2016 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
– via turbotax.intuit.com
Moving Your Money To Lower Your Taxes
Often the final amount of taxes you owe doesn’t come down to what you make, but instead what you do with it.
These are just a few ways you could get creative with your income. Here’s to a year of lower taxes and more charitable giving!
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 nonretirement account in December, check the fund company’s Web site to find out exactly when the dividend will be paid.
Convert to a Roth
If you think your tax rate is going to rise sometime in the future, converting to a Roth makes a lot of sense. Withdrawals from traditional IRAs are taxed at your ordinary income tax rate, while all withdrawals from Roths are tax-free and penalty-free as long as you’re at least 59½ and the converted account has been open at least five years. You do have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert.
Worried about not being able to pay the tax bill? Don’t be. When you convert to a Roth, you can change your mind. You have until October 15, 2015, to undo the conversion and turn your Roth back into a regular IRA.
Give to Charity
This is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only if you itemize deductions. A few bags full of gently used clothes and household items can add up to hundreds of dollars in tax deductions, but valuing those donations can be difficult. (Try Turbo Tax’s free tool).
If you donate a used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle’s fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle’s sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return. Because of previous abuses, donations of used cars and other noncash items may attract extra scrutiny from the IRS. So keep scrupulous records.
Send cash donations to your favorite charity by December 31 and hang on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you’ll also need an acknowledgment from the charity.
Give to Your Family (or Other Lucky People)
You can give up to $14,000 to as many individuals as you like before Dec. 31 without filing a gift-tax return. If you’re married, you and your spouse can give up to $28,000 per recipient.
The case for using the annual gift-tax exclusion for transferring wealth to adult children (or other lucky recipients) isn’t as strong this year as it has been in the past. The estate-tax exemption is now $5.34 million (and twice that for married couples), indexed to inflation. Only a handful of ultra-wealthy families need to worry about the estate tax at that level. But 20 states and the District of Columbia impose some type of estate or inheritance tax, and most come with much lower exemptions. Rhode Island, for example, taxes estates valued at more than $921,655 at a maximum rate of 16%.
– via www.kiplinger.com
What are your end of year financial plans?