4 Year End Strategies to Help Lower Your Tax Bill
December 9, 2015 | Your Finances
April is often associated with tax time, but that’s when the bill is due. If you want to lower that bill, you need to act now as the year comes to a close.
Here are four things that you can do now to help keep more of your money come tax time. Be sure to contact your tax advisor to determine if they are right for you.
1. Maximize your retirement contributions. By making the maximum allowable deductible contributions to your retirement accounts, you can save for the future while reducing your current taxable income. If you contribute to a 401(k), you can kick in up to $18,000 in 2015 and up to $6,000 more in catch-up contributions if you’re 50 or older. For those contributing to traditional IRAs, the annual maximum contribution is $5,500 and $1,000 for catch-up contributions (again, only if you’re 50 or older).
2. Consider the right strategy when giving to charity. If large cash gifts to charity are part of your current tax strategy, consider donating highly appreciated long-term capital gain property instead. Usually this means stocks, however it could also mean real estate you have owned for more than one year that has gone up considerably in value. By using this tactic, not only will you enjoy a tax deduction, but you will also avoid paying capital gains tax on the appreciated amount.
3. Alternate years when taking itemized deductions. If the amount of your itemized deductions is similar to the standard deduction amount each year, consider alternating the years you take itemized deductions.
For example, let’s say you and your spouse itemize $5,000 in property taxes and $10,000 in charitable contributions each year. Over two years you will have deducted $30,000.
Instead, you could double up and pay two years of property taxes and charitable contributions in a single year (and then not the following). In the year you double up, you itemize and deduct $30,000. The following year you take the standard deduction for spouses ($12,600). Over two years you will have deducted $42,600.
4. Be tax smart about your investments. If you own a variety of stocks or securities, selling off poor performers can result in a capital loss. This can be used to offsets capital gains from your more successful investments, leading to lower capital gains taxes. Up to $3,000 in excess capital losses can be used to offset ordinary income, while losses exceeding this amount can be carried over to future tax years. One thing to keep in mind, however, is the “wash sale rule.” It dictates that if you buy back what you sold within thirty days, it’s basically a wash and doesn’t count.
Whether you’re married or single, wealthy or not, the more you plan for tax season the more money you can keep in your pocket. And that’s cause for celebration at any time of the year.