By Chuck Mullen, Principal/Director – Tax
With the end of 2015 quickly approaching, it’s time to finalize your year-end tax plans. Much like we saw last year, planning will be a little more difficult than usual for year-end 2015. That is because Congress has not yet passed the infamous “Extenders” provisions, and so there again exists uncertainty this year.
If history is any indicator, Congress will likely retroactively reinstate some or all of the temporary tax rules that expired at the end of 2014 and provide some last-minute opportunities.
And so with the “Extenders” legislation still in question, this article will focus on the simple perennial recommendations which can apply regardless of the outcome of pending legislation.
And that’s why it’s important to plan ahead using available saving methods. Not every potential strategy may apply to your situation, but even a couple of steps can potentially save you some money. Here are three ways you might be able to save.
Defer (or Accelerate) Income: Timing is everything
This tip is perennially recommended as an option, but it’s important to know your incremental tax bracket this year and next year. It can be difficult to withhold some of your salary, but it can make sense from a tax perspective. If you are able to work an income postponement into your budget, you can defer some of your salary and pay tax on it next year instead of in 2015.
Another benefit of deferring income is that you may be entitled to tax breaks in the current year that that become available when income drops below certain thresholds.
If you plan on deferring, make sure that the income that you’ll push forward into 2016 won’t bump you up into a new tax bracket for the next year. Deferring some income won’t help if it will end up costing you more money than it’s worth in tax the next year. It all depends on your individual situation.
In fact, your personal situation could even make accelerating income a potential option. If it’s looking like you may get moved up to a new tax bracket next year, you may be able to accelerate that income and pay the tax on a lower bracket earlier rather than at higher rates later.
Loss Harvesting: Pulling the plug on sinking investments
Not all investments will work out, but that doesn’t mean that you can’t use them to your advantage. Loss harvesting is a strategy where you can sell off any poorly performing stock or mutual fund investments to realize those losses.
So why would you want to realize losses? Each dollar of loss matches up with your taxable gains from good investments. You can utilize up to $3,000 in net losses, and any excess losses can be carried over to the next tax year. That way you can cut bait from an investment that didn’t work out so well and use it to still save you some money. And remember, capital losses carry forward, but they do not carry back. If you have a significant capital gain in your future, make sure you recognize the capital loss before you recognize the capital gain.
Charitable Donations: The Gift that Keeps on Giving
Giving to charity is more than just a good deed; it’s a great tax benefit. Most charitable organizations are qualified recipients, meaning your contributions can be deducted against your income tax.
You’ll need to make an itemized list of your charitable deductions. Contributions of over $250 will require written confirmation from a charity, so keep your donations documented. Charitable donations are also deductible against the pesky alternative minimum tax. When all else fails, there may be no better deduction than the charitable deduction. And, if you decide to donate some stock, you can actually deduct the appreciation on that stock even though you have never paid income tax on the appreciation (must be stock that you have held more than 12 months).
Save Money Through Year-end Tax Planning
Everybody’s tax situation is different, so it makes sense that certain tax planning moves will make more sense to you than they will to others. Meeting with one of the tax experts at Apple Growth Partners can help you apply a few money-saving strategies to create a year-end plan designed for your situation.