10 Tax Moves to Make Before the End of the Year
Finances are a common focal point of New Year's resolutions, but it's wise to start thinking about taxes before end of the year. Although federal and state income taxes don't need to be filed until April 15, many deductions and credits depend on what happens before the ball drops on Dec. 31. Here are 10 money-saving tax moves to consider before the deadline.
Before trying to take advantage of money-saving tax strategies, find out where you stand by going over this year's financial documents. Try to calculate ordinary income, capital gains, deductions, and tax credits for these 12 months.
The holidays are a time to think about others, and many people choose to donate money or tangible goods to charity. Taxpayers who itemize deductions can claim one when donating to a qualified organization such as a nonprofit 501(c)(3) or religious institution. The deduction is based on the fair market value of the donated item, which may not be the same as the initial purchase price.
For taxpayers who expect to be in the same tax bracket or a lower one next year, it might make sense to delay some income until after Jan. 1 and reduce the 2015 tax bill. This may not be possible to arrange with a set salary, but employees eligible for bonuses may be able to request a payout in the new year. Self-employed workers can delay sending invoices until late December or early January.
Taxpayers in a lower tax bracket than usual this year may want to take the opportunity to sell investments that have done well and declare the extra income for 2015. Individuals with 2015 adjusted gross income (including capital gains) up to $37,450 and married couples filing jointly with income up to $74,900 do not have to pay federal income taxes on capital gains from the sale of assets held longer than a year. Immediately re-buy the investment if it's a desirable part of your portfolio.
Investors seeking a way to decrease their adjusted gross income for 2015 and get into a lower tax bracket can sell assets at a loss to offset income from capital gains. Up to $3,000 in capital losses can be deducted this year, while excess losses roll over until they are offset by future capital gains.
The annual tax exclusion for gifts lets individuals give up to $14,000 to another person without incurring additional taxes for either party. Some people use the exclusion to pass money to heirs in order to reduce future estate taxes. The exclusion applies to the total amount given from one individual to another during the year, meaning a couple could give up to $28,000 to a single person. Payments made directly to education or medical providers on behalf of another person are also tax-free.
Setting aside money in a traditional 401(k) or 403(b) may be a smart way to save for retirement and can help decrease income for the current year. In 2015 individuals can contribute up to $18,000, or $24,000 for those age 50 and older. Self-employed individuals have until Dec. 31 to establish a SEP IRA or solo 401(k) but can make contributions until April 15, or Oct. 15 if they file for an extension.
Homeowners may be able to prepay January's mortgage bill and deduct the mortgage interest in 2015. Parents of college students and taxpayers enrolled in continuing education can try to pay the next school term's tuition early, which can lead to tax savings via the American Opportunity Tax Credit or Lifetime Learning Credit (income restrictions apply).
Medical expenses that exceed 10 percent of adjusted gross income may qualify for a medical expense deduction. Employees should look for ways to spend any money left in a flexible spending account, because the balance might disappear at the end of the year. Some employers allow a grace period or a maximum $500 rollover from one year to the next.