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Eight Things to Do Now to Cash In at Tax Time

Updated for Tax Year 2015


OVERVIEW

Now is a good time to review your financial situation and do a rough estimate of your income tax bill for the year. This will give you an incentive to consider these short and long-term strategies to minimize your tax bill.


1. Contribute to an IRA

Asian woman using a tablet

Socking money away in an IRA doesn’t just help you at retirement – it can also reduce your tax bill today. The maximum tax-deductible contribution to an Individual Retirement Account (IRA) for 2015 is $5,500, $6,500 if you are age 50 or older. (The maximum contribution to a 401(k) plan in 2015 is $18,000, $24,000 if you are age 50 or over.) These benefits phase out as your income increases.

You can open an IRA account at any time and still deduct contributions made until April 18, 2016 on your 2015 taxes, but making them before year-end starts the clock on tax-deferred growth sooner.

2. Make Your House Energy-Efficient

Solar panel installation

If you make qualified energy-saving home improvements by the end of 2015, you can claim a tax credit of up to 30% of the costs. The improvements must meet federal energy-efficiency standards in order to qualify for the credit. For more information, go to www.EnergyStar.gov.

3. Review Investment Gains and Losses

Stack of money

Consider selling investment losers to offset any capital gains. When calculating your gains and losses, be sure to include mutual fund distributions; they are taxable gains even when you hold onto the shares. You may want to sell appreciated securities before year-end (or donate them to charity; see #7 below). If you have excess losses, they may be carried forward into future tax years, at a rate of no more than $3,000 each year.

4. Shift Income From 2015 to 2016

Agenda notebook with calendar

If you expect to be in a lower tax bracket next year, and have control over the timing of some income, consider deferring taxes by shifting receipt of the income into 2015. Possibilities include year-end bonuses, capital gains and self-employment income. Review your situation carefully because your tax rates could be higher in 2015.

5. Bunch Elective Medical Expenses Into One Year

Doctor and patient looking at x-ray

Because uninsured medical expenses are deductible on federal tax returns only to the extent that they exceed 10% of your adjusted gross income (AGI), you stand a better chance of having enough to deduct if you group those expenses into a single year. In adding up your expenses, consider elective dental work, eyeglasses and contact lenses, insurance premiums that you personally pay for, health and long-term-care insurance, weight-loss and stop-smoking programs, and over-the-counter medical supplies such as hearing aid batteries. There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.

6. Make Charitable Contributions

Vintage car in front of Route 66 sign

You can make year-end gifts to charity with cash or with appreciated securities. If you donate appreciated securities (like stocks), you can take a deduction for the current fair market value.

If you decide to make gifts in cash, you can simply write a check. Or you can put the amount on a credit card in December, pay the bill when it arrives in 2016 and deduct the donation in 2015. Either way, you must submit a letter of acknowledgment from the charity, showing the date of the gift, the amount, and whether you received any tangible benefit in exchange, such as a thank you gift.

Donations of used cars may be deducted at fair market value only if the charity uses the vehicle in its tax-exempt work. If the charity sells it, your contribution is limited to the actual proceeds of the sale.

7. Fund College Expenses for Your Child or Grandchild

Grandfather and grandson sitting in front of window

Contribute to a 529 college savings plan for your child or grandchild and you may reap some state income tax benefits. You’ll also ensure tax-free withdrawals from the plan to pay for future college costs. In addition, direct payments to an institution for educational or medical purposes are not subject to gift tax limitations.

8. Establish a Health Savings Account

Family surgeon in operating room

Taxpayers with high-deductible health plans who are not covered by any other health insurance or enrolled in Medicare may deduct contributions to a health savings account (HSA). HSA distributions are not taxable if you use them to pay for qualified medical expenses including deductibles and co-payments, over-the-counter drugs, long-term care insurance, and health insurance premiums or medical expenses during a time of unemployment.

An HSA provides triple tax savings: Contributions are tax-deductible, earnings on the account are tax-free, and withdrawals for qualified medical expenses are also tax-free. The account goes with you if you change jobs or move, and unused money in the account may be used in future years.

Following these suggestions can reduce your tax bill for 2015 and into the future. But keep in mind that if you are subject to the alternative minimum tax (AMT) you may lose most deductions, so you’ll need to follow very different strategies. And don’t forget state income taxes in your planning; the rules there may differ from federal tax rules.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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