The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.
As the year draws to a close, there are still many opportunities available to lower 2015 income taxes. Taking these steps before the end of the year has the potential to lower your tax bill by hundreds or thousands of dollars, depending on your income. It is important to act fast since once the year is over, it will be too late to do much about your tax bill. Fortunately, there are no significant tax changes looming as 2015 winds down that could trip you up.
Here are some effective ways to lower 2015 income taxes before the end of the year.
Boost Retirement Plan Contributions
If you haven’t maxed out contributions to your 401(k) or 403(b) retirement plan, consider doing so before year-end to lower your taxable income. The maximum amount of money you can sock away in these plans this year is $18,000. If you are not already contributing to a workplace retirement plan, you may be able to reduce your 2015 income taxes considerably if you set up a 401(k) plan through your employer by December 31.
Minimize Adjusted Gross Income
Make your adjusted gross income for 2015 as low as possible by making pretax contributions to health, dependent-care or retirement plans. The 3.8 percent surtax on net investment income and the 0.9 percent Medicare surtax typically only applies when the adjusted gross income of a married couple exceeds $250,000 (or $200,000 for a single filer). Itemized deductions on Schedule A, such as for mortgage interest or charitable gifts, generally cannot be used to lower your adjusted gross income because these write-offs are taken after your adjusted gross income is calculated.
Maximize Your Deductions
You can lower 2015 income taxes considerably by taking everything that you can as an expense and making sure that deductible payments are made by the end of the year. Qualified expenses may include payments for rent, mortgage payments, phone bill payments, and car payments. If you pay your January 2016 mortgage bill in December, you can deduct that mortgage interest on your 2015 income taxes. Second mortgages, home equity loans and lines of credit can also be used for deductions, but those deductions are limited and depend on a number of factors
Don’t Neglect These Medical Deductions
Many people are surprised by the number of medical deductions allowed by the IRS. You are currently allowed to deduct unreimbursed medical costs that exceed 10 percent of your adjusted gross income (or that exceeds 7.5 percent for people 65 and older). In addition to doctor’s bills, hospital charges, and expenses for prescribed medical devices, you can also deduct a portion of assisted-living expenses, most skilled-nursing-home costs, and certain expenses for special education. IRS Publication 502 has the full list of qualified medical expenses.
Split Large Taxable Gains
Large taxable gains have the potential to raise your adjusted gross income into phase-out or surtax territory. You can split large taxable gains over two years by selling or donating shares this year. The resulting savings could be considerable for investors facing this choice.
Offset Capital Gains With Capital Losses
Tax-loss harvesting involves selling securities in your portfolio at a loss to offset capitals gains, thereby lessening or eliminating that tax burden. Before the end of the year, examine your taxable accounts for gains and losses that can be used to offset each other. Taxpayers are allowed to use realized capital losses to offset realized capital gains, plus $3,000 of ordinary income such as wages, annually. Taxpayers are also allowed to carry forward unused losses for use in the future.
Make Charitable Donations
You can lower 2015 income taxes by making charitable donations by year-end. These charitable donations can be in cash, in property, or in stock, according to current IRS rules. Donors who make a charitable donation of stock often get a deduction for the full market value of the shares while avoiding tax on capital gains.
Make A Tax Free Gift
Each taxpayer is allowed to make tax-free transfers of up to $14,000 annually to recipients. One partner of a married couple can make $28,000 in tax free gifts if the other partner doesn’t make any. Givers can typically take the full deduction for the gift in the year it is made. If the gift is made to a qualified 529 college-savings account, federal law allows givers to bundle five years of annual $14,000 gifts, or $70,000, in a single year.
Pay Estimated Taxes Before Year End
If your taxes aren’t withheld through payroll and you are paying estimated taxes, which are due each quarter, falling behind can result in interest charges and penalties. If you settle your tax debt in the last quarter of the year using IRA distributions, you can avoid paying any additional fees.
One Last Note:
If your taxes are complicated, you can benefit from talking to a tax professional who knows what they’re doing. These tax professionals can help you develop a strategy that fits with your overall financial plan while helping you lower 2015 income taxes. It is important to use someone who is familiar with the tax laws in your state, as state tax laws can vary considerably. Choose someone that comes highly recommended and who won’t charge you an arm and a leg for their advice.
How about you all? Have you tried any of these items and have been successful in lowering your income taxes? Do you have other tricks that have worked in the past?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/86530412@N02/8266136492
