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Each year in December, Congress meets and decides whether to extend certain tax provisions, but only for one year. They make the changes retroactive, and they expire at the end of the year that they are made.
This process can make tax planning hard, because we don’t know what the representatives and senators will do. However, individuals can take steps before year-end to mitigate their tax liability for 2015.
Here are a few tips that can save you money on your taxes.
Accelerate or defer your income
The end of the year sometimes offers the opportunity to decide whether to push income to the next year for tax purposes, called “deferring” income, or to take on additional income during that current year, called “accelerating” income.
Some circumstances call for deferring income. For example, let’s say your income in 2015 places you at the high end of the 25% tax bracket. In that case you may want to defer any year-end bonuses to 2016 to avoid slipping into a higher tax bracket.
Or if you are getting a divorce in 2016 and have children, you may want to defer income to 2016, when you would be filing as Head of Household and able to take advantage of a higher standard deduction.
At other times it makes more sense to accelerate income. If you know that you are going to receive a substantial raise in 2016, you may want to take that bonus in 2015, so that you don’t take a big hit in the 2016 tax year. Or if you plan to get married in 2016, you might want to accelerate your income to 2015, when you wouldn’t be subject to the marriage penalty, which refers to the higher tax burden for a dual-income married couple filing jointly.
Donate items to charity
Before the holiday season, many people thoroughly clean their homes because they will have family visiting from out of town. While you’re at it, why not go through all of your unwanted items and donate them to charity? Doing so would allow you to take a charitable deduction for the fair market value of what you donated.
Keep in mind that you don’t have to donate only old clothes, old cars or housewares. You can also donate the required minimum distributions from your IRA. People over age 70½ are required to take these distributions even if they don’t need or want them; in fact, taking these RMDs could cause taxpayers to be pushed into a higher tax bracket and make more of their Social Security income taxable.
>> MORE: How to Open a Roth IRA
You can instead donate your RMD directly to a charity of your choice. Because the RMD does not go directly to you, you would not have to claim it as income and would not have to pay tax on it. This provision expired at the end of 2014, but it should be extended through 2015.
Harvest your gains and losses
If you are carrying forward a capital loss, you may want to sell some securities in 2015 that have done well, and limit your tax exposure. This is known as “harvesting gains.” For instance, if you are carrying forward a $25,000 capital loss from 2014, you could sell up to $25,000 of stocks at a gain and it would effectively be tax-free.
The same goes for losses. If you sold securities in 2015 and made money, you should look for some securities in your portfolio that you could sell at a loss to offset your gains. This is known as “harvesting losses.”
Use your health savings account
Be sure to use the tax advantages of your health savings account, which enables you to set aside pre-tax money from your salary and use it for health expenses. If your medical plan has a minimum deductible of $1,300 and a maximum out-of-pocket cost of $6,450, for single individuals, you can contribute $3,350 to an HSA. If you are age 50 or over, you can contribute an additional $1,000.
If you have a family, and your minimum deductible is $2,600 with a maximum out-of-pocket cost of $12,900, you can contribute $6,650 to your HSA. If you are age 50 or over, you can contribute an additional $1,000.
These accounts aren’t just a good way to pay for health care in a given year. They also let account holders roll the funds over year after year and let them grow, tax-free.
As you start gearing up for the holidays, don’t forget that you can make your tax burden lighter. Talk to your tax advisor and see what makes sense for you.
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