The end of the year is approaching and now is the time to take action to lower your tax bill.
Here are four moves you can make now so you can have a smile on your face when you do your 2015 tax return next year.
1. Reap What the Market Sowed
Selling stocks or mutual funds that have unrealized losses allows you to offset profits made on other investments. After all your gains and losses have been netted, if you still have losses remaining you can deduct up to $3,000 of those losses against other types of income. Any losses beyond this may be carried forward to future years.
There are a few important details to remember with tax-loss harvesting. First, beware of the wash sale rules. If you sell a stock at a loss but then repurchase the same stock within 30 days, it is considered a wash sale. This means the losses you thought you harvested for tax purposes are not allowed. Second, this strategy only works with taxable accounts, so you cannot use this strategy in retirement accounts such as IRAs or 401(k) accounts.
2. Timing is a Game We Play
Except for a few items, your taxes are almost entirely based on income received and deductions paid within the same year. For example, if you pay your January mortgage bill before Dec. 31, then you can deduct that payment’s interest on your 2015 return. Similarly, if you can defer any income until next year, it will not be taxed until 2016. One way to do this, for example, is if you run your own business, then you can wait until January to bill clients for work done in December.
Beware that playing the timing game can help this year but hurt next year. If you pay your mortgage early this year, then you will have one less interest payment to deduct next year. One reason people engage in a timing strategy is that itemized deductions only benefit you to the extent that they exceed your standard deduction, so see-sawing between years of higher and lower deductions might be of benefit depending on your personal situation.
3. Stockpile for Your Golden Years
Unlike most income and deductions where timing is based on current year transactions, certain retirement account contributions are an exception to the rule. Extra 401(k) contributions for example, must occur within the taxable year, whereas IRA contributions can be made any time through the tax filing deadline and still be deductible for 2015.
4. Give Until it Hurts
You might begin noticing an uptick in solicitations from charitable organizations around this time of the year. There are two reasons for this. First, many of us feel extra generous during the season between Thanksgiving and Christmas, so we are more inclined to donate to organizations. Second, these organizations know that this is crunch time to make donations that can be deducted for tax purposes. There are a few things you can do to up your charitable contribution deduction.
First, go clean your closets and garage. If you were going to donate clothes, furniture or other household items, now is the time to do so. Be careful how you value used items you donate. Large, non-cash donations can attract extra scrutiny from the IRS, so keep track of all giving and how you determined the value of your donations.
Second, cash donations need to be made before Dec. 31 to be deductible on your 2015 tax return. Donations made by credit card, however, only need to be charged on or before the end of the year – you can pay the credit card off in January and still take the deduction. Lastly, remember to keep records such as canceled checks, etc. Cash contributions of $250 or more mean you will need an acknowledgement from the charity.