Don’t let the hustle and bustle of the holiday season keep you from exploring ways to minimize your 2015 income-tax liability. Waiting too long can prevent you from using planning moves that can help reduce your tax bite. Consider whether any of the following strategies are appropriate for you.
Save More, Pay Less
Increasing your pretax contributions to an employer-sponsored retirement plan may help you lower your tax bill. You don’t pay current income taxes on the money you contribute to your plan account, so deferring a greater amount of your pay means less money is withheld for taxes. If you’re age 50 or older and already contributing the maximum annual amount through salary deferral, find out if your plan allows catch-up contributions.
Contributing to a traditional individual retirement account is another option. Contributions made by April 18, 2016, may be deductible on your 2015 income-tax return. The contribution limit for 2015 is $5,500 ($6,500 if you’re age 50 or older). Your tax advisor can review the deduction requirements with you.
Your Charitable Side
You can donate to your favorite charities and increase your itemized deduction for charitable contributions by making 2016 gifts by the end of 2015. Donating with a credit card or with a check mailed by December 31 entitles you to a deduction on your 2015 income-tax return even though you won’t get your credit card bill or have your check processed until 2016. Check the charity’s tax-exempt status before you donate, and keep records of your donations. Deduction limits apply.
Look Over Your Losers
You may want to consider selling any investment that has lost value since you acquired it, especially if it has consistently under performed a benchmark and doesn’t show signs of improving. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses that you can’t deduct for 2015 can be carried over for deduction in future years, subject to the same limitations.
Time for Profits?
Have you been thinking about selling and taking your profits on appreciated stock you’ve held longer than one year? Favorable capital gain tax rates might make this a good time. Currently, long-term gains from the sale of stocks and other securities are taxed at 15% for most taxpayers, 0% for taxpayers in tax brackets below 25%, and 20% for taxpayers in the top regular tax bracket (39.6%). You can use any losses to offset your gains from the sale of appreciated securities.
Taxes should never be your only reason for holding or selling an investment. Look at the impact your decision would have on your overall portfolio before you make a move.
You may be able to exceed the floor amount for medical deductions by scheduling and paying out-of-pocket medical costs before year-end. For 2015, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income (AGI) or 7.5% of AGI for taxpayers age 65 or older.