As 2015 winds down, it’s a good idea to budget for your 2015 personal income tax bill, in the event that you’ll owe the IRS money. Taxpayers who review their situations before year end have many more tax-reduction strategies at their disposal than those who wait until after the start of the tax filing season. Here’s a brief summary of 7 smart ways to lower that tax bill. Don’t forget that you must act before December 31.
- Pay Deductible Expenses Early – If you itemize deductions, consider accelerating some deductible expenses to produce higher 2015 write-offs. This generally makes sense if you expect to be in the same or lower tax bracket next year. You’ll reduce your income tax liability over the long run only if you’re in a lower bracket next year; if you’re in the same bracket, you’ll simply defer part of your liability until next year.
- Pay College Tuition Bills Early – If you qualify for the American Opportunity credit or the Lifetime Learning credit but haven’t incurred enough expenses to max out the credit for 2015, consider prepaying tuition bills due in early 2016. Specifically, you can claim a 2015 credit based on prepaying tuition for academic periods that begin in January through March of next year.
- Defer Income – It may be worthwhile to defer some taxable income into next year if you expect to be in the same or lower tax bracket in 2016. For example, if you’re a self-employed, cash-basis taxpayer, you might postpone recognizing taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive these payments until early 2016.
- Sell Underperforming Stocks Held in Taxable Accounts – Selling losing investments held in taxable brokerage firm accounts can lower your 2015 tax bill, because you can deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss.
- Gift Appreciated Assets to Family Members in Lower Tax Brackets – For 2015, the federal income tax rate on long-term capital gains and qualified dividends is still 0% for taxpayers in the 10% or 15% rate brackets. While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the lower tax brackets. If so, consider giving them appreciated stock or mutual fund shares. They can sell the shares and pay 0% federal income tax on the resulting long-term gains.
- Donate to Charity – Charitable donations can be one of the most powerful tax-saving tools because you’re in complete control of when and how much you give. No floor applies, and annual deduction limits are high (20%, 30% or 50% of your AGI, depending on what you’re giving and whether a public charity or a private foundation is the recipient).
- Consult with a Tax Professional – As always, year-end tax planning must take into account each taxpayer’s particular situation and goals. Consult with your tax adviser before year end to devise a tax-saving plan that most effectively meets your needs and factors in the latest tax rules.
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