Top Ten Year-End Tax Strategies for 2015

  1. Make a charitable donation. If you are thinking about donating to a charity or church, why not do it before the New Year? Money donated to a charitable organization in December will likely generate tax savings a year earlier than money donated in January. Clean out your closet and donate old clothes to a nearby charity. Appreciated stocks can also be donated in order to receive a tax deduction and avoid capital gains taxes.
  2. Contribute to your retirement account. If possible, increase your contribution to your 401(k) plan, 403(b), IRA or other qualified plan for the last few weeks of the year. In the special case of a traditional IRA, you have until April 15th of the current year to make a tax deductible contribution for the prior tax year. As with all strategies, the total tax savings of contributing to a retirement account depends on your marginal tax bracket. For example, someone in the 25% marginal tax bracket would save $250 in taxes per $1000 of contributions.
  3. Pay January’s expenses in December. If you expect income next year to be similar to or lower than this year, pay January’s mortgage payment and real estate taxes in December. If you are self-employed, prepay rents, utilities, advertising costs and other business expenses.
  4. Defer income until next year. If you are expecting a big Christmas bonus, ask your employer to postpone it a couple weeks. If you are self-employed, send out December’s invoices in January. As with many of the strategies outlined in this document, deferring income should only be done if you expect next year’s income to be similar or lower than this year’s.
  5. Clump similar expenses into the same year. Some expenses, such as medical expenses and unreimbursed employee expenses, will not result in any deduction unless they exceed a certain amount. Medical expenses, for example, are only deductible to the extent they exceed 10% of your adjusted gross income (AGI). Someone with an AGI of $100,000 would not have deductible medical expenses unless those expenses exceeded $10,000 (or 10% of their AGI). Paying $8000 of medical expenses this year and then another $8000 next year would not result in any tax deduction. If these expenses could be somehow “clumped” into one year so as to exceed $10,000, a tax write-off would result.
  6. Sell loser stocks. Look carefully at your portfolio. Do you have any stocks that have lost a lot of value and have little chance of rebounding? Sell such “loser stocks” before the end of the year to offset any capital gains incurred during the year. After you have offset your capital gains with your capital losses, you may deduct up to $3000 of capital losses against your ordinary income.
  7. Buy a car. In locations with no state income tax (such as Washington), many tax payers benefit from deducting the estimated sales tax they paid during the year. Sales tax paid on an automobile can be added to the estimate in most cases.
  8. Prepay college costs. The IRS offers large tax credits and deductions for out-of-pocket education expenses. Paying tuition for you or a dependent before the end of this year will allow you to claim those credits and deductions this year’s tax return. For example, you may want to pay the winter semester tuition bill in December.
  9. Adjust your withholding. Receiving a large refund each year may be fun, but the fact is that you have been giving the government an annual interest-free loan. Lowering your withholding will allow you to use your tax refund throughout the year and even receive interest on it.
  10. Pay your kids. Have your kids worked for your business this year?  Have you given them a paycheck yet?  If not, make sure you do this by the end of the year.  “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child” (IRS Publication 15).

Disclaimer: While PorterKinney PC has made every attempt to ensure the accuracy of this document, it is not responsible for any errors or omissions, or for the results obtained from the use of the information in this presentation. This document been prepared for information purposes and general guidance only and does not constitute legal, accounting or other professional advice. Circular 230 Notice: The information included in this presentation is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties or (2) promoting, marketing, or recommending to another party any tax related matters.