December isn’t traditionally seen as tax time. But during the last days of the year, you can take steps to lower your bill when you file your returns. Here are six moves to consider.
1. Be generous
Add tax-smart gifts to your holiday shopping list. You can claim charitable donations as tax deductions for 2016 as long as you make them by Dec. 31 and itemize your taxes. Donations of money, clothing or household items all qualify. Many nonprofits also accept cars or other vehicles, and some accept stock that has appreciated in value but no longer fits your portfolio strategy. Whatever you give, get a receipt. Without one, the IRS can nix your donation deduction.
Older taxpayers have an additional option. If you’re 70½ or older, you must take a specified amount each year, known as a required minimum distribution, from your traditional IRA, 401(k) or other tax-deferred retirement accounts. Fail to do so by Dec. 31 and you’ll face a stiff tax penalty. But if you directly transfer your distribution amount to an IRS-qualified charity, you’ll meet your withdrawal requirement and won’t owe tax on the money.
2. Harvest capital gains and losses
Reviewing and rebalancing your investment portfolio is a good annual exercise. If your income is low, consider selling some stock you’ve held for more than a year that has increased in value. Investors in the 10% or 15% tax brackets don’t have to pay any capital gains tax on these long-term capital gains.
Folks in higher tax brackets will face capital gains taxes of 15% or 20% on the sale profit of long-term assets. You can offset that tax by selling other holdings that have lost value. If it was a bad investment year and you have more capital losses than gains, use up to $3,000 of your excess capital losses to reduce your ordinary income.
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3. Take advantage of your home
Homeowners are well aware of the many tax benefits a house provides. Boost those breaks by making your January mortgage payment by Dec. 31, moving its tax-deductible loan interest into this tax year. Keep in mind that this will give you one less payment to deduct next year, so make sure you need the break in 2016. The same strategy works for deductible real estate taxes if you pay them by the end of the year.
Certain home improvements also offer a tax break. Making relatively easy energy efficiency upgrades, such replacing drafty windows or adding insulation, could earn you a tax credit of up to $500. Other home improvements qualify, but there are specific credit caps. Plus, if you’ve claimed this credit any time since 2006, you must subtract those amounts from the $500 maximum.
4. Examine your sales tax deduction
If you’re considering whether to claim the state sales tax itemized deduction instead of the Schedule A write-off for state income taxes, the decision is much easier if you made a big purchase this year. That’s because sales tax paid on a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van or off-road vehicle — or, if you really splurged, a boat or a plane — is deductible.
5. Make medical moves
Most taxpayers can deduct only the portion of their medical bills that’s in excess of 10% of their adjusted gross income. To clear that threshold, schedule medical treatments before Dec. 31. Older taxpayers can deduct expenses in excess of 7.5% of their AGI in 2016.
If you have a medical flexible spending account at work, don’t waste that money. Some companies let employees use funds through the following March or carry up to $500 into the next year, but others require FSA owners to use or lose the funds by the end of the year.
6. Pay for college
After the holiday break, college students will head back to campus. You can pay next semester’s tuition now and claim the American Opportunity Tax Credit on this year’s tax return. The credit, a dollar-for-dollar reduction in any tax you owe, could be as much as $2,500 and can even refund you up to $1,000 if you don’t owe any tax (note that there are income limits to be eligible for this credit).
The early payment option also applies to school costs that can be used to claim the Lifetime Learning Credit, which is worth up to $2,000 and available for students beyond the standard four years of undergraduate study.
Kay Bell is a contributing writer to NerdWallet, a personal finance website.