Year-end tax planning tips for individuals
Posted On: 11-11-2015 | Posted By: Katie Barthel, CPA
As the end of the year approaches, it’s time to begin thinking about what steps you can take to reduce your 2015 personal income tax bill and how to best plan for future tax years. It’s best to start thinking of this now, before the holidays approach, to allow time for your tax professionals to help you complete any necessary work.
Below, we will introduce some of the easiest ways you can reduce your 2015 tax liability, should that be your goal, and we’ll share other ways you can improve your taxable situation in tax years beyond 2015.
Pay College Tuition Bills Early
If you have a kid in college or attend college yourself, you should think about pre-paying some of your tuition bills so that you can take advantage of the educational tax credits that are available to you, such as the Lifetime Learning or American Opportunity credits. You are eligible for prepayment of tuition for any academic session that will begin in January, February, or March 2016. Before you make these payments, please contact your WK advisor to see if you will be eligible for these credits; some of these credits are phased out for high earners.
Pay Deductible Expenses Early
If you itemize your deductions, paying some of your annual expenses in December is an easy way to reduce your 2015 tax liability. You could prepay your mortgage bill, property taxes, or medical bills. Medical expenses will be deductible even if charged to a credit card by the end of the year, but not yet paid.
Contribute to a Charity
Consider making a tax-deductible donation to a charity. Many charitable organizations hold drives, especially around the holidays, where they accept items that are lightly used that you no longer need. For items of value less than $5,000, you will not need an appraisal. Just make sure to get a receipt showing a description of your donation, the date, and the estimated value. You may also decide to gift marketable securities. If you choose to do so, make sure that you contribute the property in-kind so you can avoid taxes on the appreciated value of the assets.
Offset Capital Losses with Capital Gains
Take a look at how your capital gains and losses look thus far for the year. If you seem to have quite a few capital losses, you may consider selling additional securities that are expected to sell at a gain so that you can offset these gains with the losses you’ve already sustained.
Transfer a Personal Loan into a Home-Equity Loan
Interest on personal loans is never deductible on a tax return, but interest on a home equity loan less than $100,000 is. The loan proceeds may be used for any purpose except to purchase tax-exempt obligations.
Alter Withholding Amounts
If you determine that you will most likely be underpaid on your 2015 estimated taxes, an option you have available is to increase your withholdings for the remainder of the year. Because withholding on compensation is deemed to be made ratably over the year, you may be able to skirt underpayment of estimated tax penalties using this approach.
Make Year-End Gifts
Making a gift will not affect your 2015 taxable income, but a good tax plan includes making annual gifts up to the annual exclusion amount of $14,000 per individual if you are worried about exceeding the estate tax lifetime exemption of $5.43 million.
Make Deductible Retirement Plan Contributions
If you and your spouse are not covered by a retirement plan through either of your employers, you will be able to make deductible traditional IRA contributions up to $5,500 or $6,500 if you are age 50 or older. If you or your spouse is covered by an employer’s retirement plan, you may still be eligible for a traditional IRA contribution deduction if your income is below a certain threshold.
Make an HSA Contribution
Contributions to a health savings account can be taken as a deduction, and HSA contributions, unlike FSA (flexible spending account) contributions, can typically be made at any point during the year. A $1,000 catch-up contribution is available to individuals aged 55 or older above the $6,650 maximum contribution for families.
If Self-Employed, Start a New Business
Start-up expenditures of up to $5,000 are fully deductible subject to phase-out thresholds.
Place Business Assets in Service by December 31st
Under Section 179, taxpayers can expense up to $25,000 worth of assets placed in service in the 2015 tax year rather than capitalizing those expenses over the life of the asset.
Consider Hiring and Paying Salary to your Child
If you hire your child as an employee, the salary your child receives may be taxed at a lower rate, and the payment for this salary will be deductible by your business. The child must be performing legitimate business tasks and should be receiving a reasonable salary for the services they provide.
Accelerating deductions and deferring income are ways you can reduce your current year tax liability, but this also may inadvertently increase your tax liability next year. Reducing your current-year taxable income should not always be your ultimate goal. You must look at these tax planning strategies using a multi-year approach so that you can get the best tax outcome for the foreseeable future.
If you would like to discuss these strategies in more detail, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.