As you enjoy the holiday season and your traditions, don’t forget to set aside time for a little tax planning before New Year’s Eve. While tax planning might make you feel more like the scrooge, it can save you money in the long run by minimizing your overall tax liability. Some tax moves will take some planning, others however, are easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Tip No. 1:Defer income
Be aware of your tax bracket. The general rule is to defer income to next year when possible as long as your tax rate for 2015 is the same or higher than what it is projected to be in 2016. The rates are graduated with the top tax rate as high as 43 percent. If your remaining income will push you into a higher tax bracket, postpone receiving money wherever you can. For example, ask your boss to pay your bonus in January; put more money into your tax-deferred retirement plan; or hold off on selling assets that will produce a capital gain. If you're self-employed, send invoices for year-end jobs in January 2016.
Tip No. 2: Add to your retirement
Put as much money as you can into your 401(k) or similar workplace retirement savings plan. Traditionally, plan contributions are made on a pre-tax basis, so you'll have less taxable income on which you will pay income taxes. The maximum amount employees can put into a 401(k) plan this year is $18,000, but any amount you contribute will help. If you are age 50 or older as of Dec. 31, you can contribute an extra $6,000. If you aren’t contributing the maximum to your retirement plan, you should see if you are able to increase your 401(k) contributions for 2016. The end of the year is a great time to make adjustments for the next year. If you aren’t contributing enough to receive the full company match you are leaving money on the table.
Tip No. 3: Review flexible spending accounts
If you contribute to a medical flexible spending account (FSA) through your employer, be sure you don’t waste it. As part of the Affordable Care Act the maximum contribution amount was set at $2,500 with annual adjustments for inflation. Like 401(k) plans, money goes into an FSA on a pre-tax basis, reducing your tax liability. But any money you leave in your FSA at the end of the year is forfeited by you. Some companies allow a grace period into the next year to use the remaining FSA funds, but are not required to provide this option. Make sure you check with your employer to ensure you don’t lose any FSA funds.
Tip No. 4: Use capital losses to offset capital gains
If you have investment assets that have lost value, use these losses to reduce your overall income. Capital losses can be used to offset any capital gains. This is a good time to review your portfolio, and if you have more capital gains than losses, recognize capital losses to offset the excess gains. You can also use up to $3,000 of capital losses in excess of gains to reduce your ordinary income that is taxed. Capital losses in excess of $3,000 can be carried forward indefinitely to future tax years.
Tip No. 5: Take advantage of owning a home
Home ownership provides a variety of tax breaks, some of which you can utilize by year-end to reduce your current year's tax bill. For example, you can make your January mortgage payment by Dec. 31 and deduct the mortgage interest on your 2015 return. You may also benefit by paying your property tax payment due in early 2016 in December.
Tip No. 6: Pay college costs early
The American Opportunity credit is a wonderful way to let Uncle Sam help subsidize college costs if you qualify. The maximum annual credit is $2,500, with up to 40 percent of this credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes. If the spring semester bill isn't due until January, it might be beneficial to pay it before the end of the year. Doing so may allow you to maximize the American Opportunity Tax Credit on this year's tax return.
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