The remaining weeks of the year present a good opportunity for consumers to review their retirement portfolios and existing debts and expenses to garner additional savings before tax season next spring.
As your start your overview, calculate your income, tax payments and deductions so far and estimate your totals for 2015, said Rebecca Pavese, a CPA, financial planner and portfolio manager with financial planning firm Palisades Hudson Financial Group’s Atlanta office.
“You need this baseline information before making any moves,” she said.
It may take some time and focus, but following the steps below will allow you to have a clear understanding of your financial picture before next year. The time you allocate to this process will help save you money, and as such, you are essentially investing in yourself.
Deductions For This Year
The best method is to determine if some of the payments you've already made already are taxable such as contributions to an IRA account, health savings account, state and local tax payments and donations to non-profit organizations.
Also increasing funding to any of those accounts by the end of the year can lower the amount of taxes you pay next year.
“Lowering your income has many potential benefits,” Pavese said. “If you can lower your taxable income to below $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay 0% federal tax on sales of assets you’ve held longer than one year and 0% on dividends," Pavese said. "Even if you can’t get your taxable income quite so low, you may be able to lower it enough to step down to the next lowest capital gains tax rate.”
Utilize extra savings or a bonus by allocating funds into a retirement account instead of spending it. The maximum contribution for a 401(k) retirement plan is $18,000 for 2015 while the contribution limit is $5,500 for traditional and Roth IRAs.
“If you can't afford to max out contributions, consider contributing up to your employer’s match and increase contributions by a percentage or two each year,” said Jeffrey Caruso, principal of O’Connor & Drew, a Winchester, Mass.-based CPA firm. “Contributions made on a pre-tax basis lower your taxable wages dollar for dollar.”
Instead of making an extra mortgage payment, allocate the money into one of your retirement accounts, because the tax benefits will be higher, said J.J. Montanaro, a certified financial planner at USAA, a San Antonio-based financial institution. An additional payment of $760, which includes $545 of interest for a $150,000 mortgage at 4.5% interest would result in $81 of tax savings.
On the flipside, if you chose to make a $760 contribution to a 401(k) or IRA, it would result in $114 in tax savings based on your pre-tax contribution, plus up to $380 in tax savings from the saver’s credit, which is a total of $494 in potential tax savings from the $760 move and is “much more powerful,” he said.
If there are still available finds after maxing out your retirement accounts, homeowners could opt to make their January mortgage payment in December, which would lower their taxes by increasing the 2015 deductible interest, Montanaro said. Make sure the payment posts by the end of the month and also coordinate with the lender to ensure the extra payment is not applied towards the principal and goes to the interest.
This same strategy can also be applied to student loan payments by paying January’s payment in December, so you can take the deduction this year instead of waiting, said Jordan Barry, a law professor at the University of San Diego School of Law.
“One thing you want to keep in mind though is that the deduction is capped for 2015 at $2,500,” he said. “If you're already above that total, moving January's payment up won't help you at all.”
Students who were planning to take a class in the spring can lower their tax bill if they sign up for the course now and spread out their payments to “take advantage of the credit both this year and next,” Barry said. The lifetime learning credit allows consumers to reduce their tax bill by $2,000 annually.
“That can lower the overall cost of your course by $4,000 instead of $2,000,” he said.
Scheduling dentist or eye doctor appointments before the end of the year could be a benefit because hearing aids, eyeglasses, contact lenses, hospital fees for nursing, most dental expenses, physical therapy, lab tests and X-rays are all deductible, said Brian Ashcraft, a director for Liberty Tax Service based in Virginia Beach, Va.
Writing large checks each spring might mean that the amount of tax being withheld from your paycheck is insufficient. While obtaining a large refund each spring is tempting and feels like extra cash, this windfall is really an “indication that you’ve withheld too much in taxes from each paycheck and tied up your hard-earned cash in an interest-free loan to Uncle Sam,” said Meredith Tucker, a manager at Kaufman Rossin’s entrepreneurial services department, the Miami CPA firm.
The silver lining to a volatile stock market is that you can at least salvage some losses on your taxes. After a year of investment whiplash, now is the time to sell your losing stocks even if you despise selling them. Losses in the stock market can be deducted, so selling stocks which have incurred a capital loss will reduce a person’s tax bill.
“Many investors are loath to sell anything at a loss, because until they realize the loss, they don't have to admit they made a mistake,” said Robert Johnson, president of the American College of Financial Services in Bryn Mawr, Pa. “Many investors suffer from ‘breakevenitis’ and are just waiting for the stock or fund to sell at the price they bought it at to avoid realizing a loss.”
In this case, a loss is good for your taxes, because it lowers the amount you will have to pay. A large percentage of investors like to keep stocks that have been declining, but a “much better strategy is to realize your losses and let your winners ride,” he said.
This strategy benefits investors who have also shed some of their winners.
“There’s dollar-to-dollar offset – if you had $5,000 of capital gains, you can offset them completely with $5,000 of capital losses,” said Pavese.
When to Push Deductions to 2016
When consumers find themselves moving into a higher tax bracket because they received a substantial raise, they should consider moving some deductions to the following year. When you defer some deductions, this method can help consumers pay less in taxes in the long run. Instead of paying your estimated quarterly state income tax by December 31 and taking the deduction on your 2015 return, consumers can opt to pay it from January 1 to January 15 and take the 2016 deduction, she said.
“If your bracket will go up next year, consider deferring certain deductions such as state taxes and real estate taxes so you can claim them on your 2016 return,” Pavese said. “The higher your bracket, the more the same deduction can save you.”
The IRS allows you to deduct other expenses you might not have considered, but they tend to be a rather hefty amount. Once you have adjusted your gross income, you can deduct unreimbursed medical expenses can only if they exceed 10% of that income and investment expenses must exceed 2%, said Pavese. Combine expensive medical procedures so they occur in the same year to maximize this option.