Fortunately, some thoughtful end-of-year tax planning could result in you paying far less than you ever imagined. Here are nine tax moves to make before year-end that could lead to thousands of dollars in savings when the tax bill comes due.
1. Max Out Your Tax-Advantaged Retirement Accounts
When it comes to tax-advantaged retirement plans, you generally have until April 15 – or your extended tax filing date – to make tax-deductible contributions. But that’s not case when it comes to employer-sponsored 401(k) plans. For a work-sponsored 401(k), the only deductions that count toward your 2015 taxes are the ones you make before December 31st.
The maximum contribution for 401(k) plans in 2015 is $18,000 – or $24,000 if you’re age 50 or older. If you are below these thresholds, and would like to pump up your balances before year’s end, you still have time. Don’t waste it.
2. Make Business Moves that Count
If you have your own business, you may get a nice tax deduction by purchasing certain business-related assets. While such assets are normally depreciated over several years, there is a provision within the IRS tax code – referred to as Section 179 – that allows you to write off the entire cost of certain assets in the year purchased.
Under Section 179, you can deduct up to $25,000 of assets purchased for 2015. Even if the asset purchase exceeds your net income for the year, you’ll be able to carry the deduction forward to future tax years.
If there is a major business asset you are thinking about purchasing in the next few months, make sure to weigh the pros and cons of pulling the trigger by the end of the year. In the meantime, discuss the situation with your accountant to make sure the purchase makes sense in relation to your long-term tax goals.
3. Generate Capital Losses to Offset Capital Gains
Has 2015 been a good year for your portfolio? If so, you may cringe when you see that you are forced to pay capital gains taxes when April 15th rolls around.
Fortunately, the IRS provides generous exemptions for long-term capital gains. However, those exemptions do not apply to short-term capital gains. Those are taxed at your regular income tax rates, and that can substantially increase your tax bill.
If you have a large amount of short-term capital gains, now is the time to review your portfolio to see where you can generate capital losses that will offset those gains – and the income tax liability they’ll create.
4. Pump Up Your Charitable Contributions
If you have enough deductions to itemize this year, make sure to make as many charitable contributions as you feel comfortable with, provided you planned to make them anyway.
This is especially important in regard to non-cash contributions. You can deduct a reasonable amount of non-cash donations ($250) without any documentation at all. If you want to maximize this rule, clean out your garage, basement, and closets, and find items to donate in exchange for a hefty deduction.
5. Make Your State Income Tax Estimate Before Year-end
If you are set up to make estimated tax payments for your state, be sure that you make the January 15 payment before December 31st of this year. This isn’t just about having your state tax estimates made; in fact, state income tax payments are deductible for federal income tax purposes. Make that last payment before December 31, and you’ll be able to deduct it on this year’s federal income tax return.
6. Get a Social Security Number for New Dependents
You can take a deduction for any dependents that you have, but there is one major caveat – the dependent must have a Social Security number.
If you have a new dependent this year, you should apply for a Social Security number with the Social Security Administration right away. That way, you’ll be ready to take your lawful deduction for that dependent when you file your income taxes next spring.
7. Pay Your January Mortgage Payment in December
You can take a deduction for mortgage interest paid, but only for interest that was paid during this tax year. If you’re able to pay your January mortgage a few months early, you can legally take a tax deduction for the extra mortgage interest you paid this year. Just by moving your payment up a few days or weeks, you could potentially save hundreds of dollars.
8. Work Up a Year-End Tax Projection
Most professional income tax preparers will do this for a very nominal fee. And if you use a tax preparation software package, you could probably do the same thing with just the press of a button. Just make sure to make adjustments for changes in your income and deductions for this year.
An accurate tax projection will provide you with a reasonable estimate of your income tax liability based on your year-to-date income and specific tax situation. If it appears you will owe when you file your return, you can take steps now to make sure that doesn’t happen.
9. Increase Your Tax Withholdings if Necessary
The easiest way to avoid having to owe money in April is to increase your income tax withholding from your pay. Alternately, if you’re self-employed, you can increase your January 15 federal and/or state income tax estimate accordingly.
Not only will this help you avoid writing a check when you go to file your taxes, but it will also eliminate the likelihood of facing penalty and interest charges for not paying enough throughout the year.
The Bottom Line
With only a few months before the end of the year, you don’t have much time left to save on your 2015 tax bill. Using some of these strategies now will make income tax filing easier and less – well, taxing – next spring.