Welcome to the third quarter, when it's time to start thinking of 2015 as a tax year rather than the buffer between yourself and your next filing.
Though the end of the year is still a little more than two months away, financial advisors would like to remind you that there are a bunch of year-end tax moves you can make to reduce the bill you'll get from Uncle Sam. If you're lucky, a couple of them just might even send some more money your way. them move those assets back into your pocket.
“As we enter the end of the year, taxes are on many of our clients’ minds,” says Mike Lynch, vice president of strategic markets at Hartford Funds. “We encourage reps and clients to think about this all year long, so that we aren't scrambling at the end of the year by discussing being tax diversified.”
Granted, this year Congress is making advanced planning for the 2015 tax season a little more difficult than it has to be. With no budget in place and the threat of a government shutdown still looming, a whole lot of your potential deductions are still in limbo.
“We're still waiting on Congress to extend the budget, so a lot of things that we typically have we don't right now,” says Mike Greenwald, partner at Friedman, LLP. “We don't have bonus depreciation and we're waiting on Congress to see if they'll re-enact the state and local sales tax deduction. We don't have that, we don't have the $250 educator deduction and we don't have a lot of the student loan deductions, because they expired at the end of '14.”
Just don't use Congress's intractability as an excuse. It typically helps if you've been taking a sound approach to your taxes year-round. Rebecca Pavese, a certified public accountant and financial planner with Palisades Hudson Financial Group’s Atlanta office, notes that a healthy first step involves getting organized and taking a look at tax contributions you may not have changed since your employer hired you. Even if you have tinkered with your withholdings, make sure the IRS is getting enough of a cut to keep them from looking for more after you're filed.
”If you adjusted your tax withholding during the year in order to keep a cash buffer on hand, make sure you haven’t fallen short of meeting your obligations for the year,” Pavese says. “If necessary, adjust your December withholding, which may help eliminate the prospect of estimated tax penalties and interest. You can adjust your withholding by submitting a new W-4 form to your employer.”
Even if you've taken that step, the simple matter of spreading money around to taxable, tax-deferred, and tax-free accounts can likely be solved at the workplace as well. Pavese suggests starting off by maximizing your retirement savings to minimize the tax hit.
“Increasing contributions to many sorts of retirement plans, including 401(k)s and IRAs, will reduce your adjusted gross income,” she says. “If your per-paycheck contributions are not enough to hit the contribution limit for the year, you can ask your employer to deduct a one-time lump sum to catch up. At a minimum, 401(k) plan participants should contribute enough to take full advantage of any company matching.”
The easiest way to knock down that adjusted gross income by beefing up your “above the line” deductions across the board. Yes, that includes IRA contributions, but it also encompasses health savings account contributions and qualified moving expenses. Even if you pay state income taxes before December 31, you can deduct them on your federal return after sending an estimated payment.
Why do this, you ask? Well, if you can hold your adjusted gross income to $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay 0% tax on sales of assets you’ve held longer than one year and 0% on dividends. Even if you can’t get your AGI that low, you may be able to step down to the next lowest capital gains tax rate. Since many deductions are calculated by your adjusted gross income, knocking it down can make those less daunting.
“Unreimbursed medical expenses can only be deducted if they exceed 10% of AGI, for example,” Pavese says. “On the other hand, if you expect to be in a higher tax bracket next year than you are this year, deferring deductions where possible can potentially help you pay less tax in the long run.”
Beyond that, you may also want to look into your broader investment portfolio for some savings. The Hartford Fund's Lynch notes that selling out of a fund or stock by the year's end can help diversify holdings and, at the very least, can give you a loss to deduct.
“Is this a long-term investment or something I might be better off without and no longer fits my long-term needs?” he says. “Can I take advantage of a loss, or do I already have a prior loss in something that I can take advantage of? These exact questions should be covered with both tax and financial professionals.”
Those losses can eventually add up to big savings. If you're attentive enough to recognize your losses on a yearly basis, loss selling can help you whittle down future tax hits even if you're not particularly worried about this year's numbers.
“Simply put, tax loss selling is a strategy to minimize capital gains on one asset by realizing a loss to offset it,” Pavese says. “You can also carry tax losses forward indefinitely, so if you don’t end up needing to offset capital gains right away, you can use the loss to offset a gain in a future year.”
“Keeping inventory of donations should ideally be done throughout the year, but for those of us that may have given goods or money early in the year, tracking the receipts can be difficult,” Lynch says. “Now might be time to look at the junk drawer, that drawer in the corner of the kitchen where old receipts go to die. Make a folder and start putting those receipts in it.”
You can donate cash, sure, but there's also a way to get a deduction by giving away your high-performing assets. If you purchased shares for $1,000 and they are now worth $10,000, giving those shares to a qualified charity would give someone in the 28% tax bracket a $2,800 tax deduction based on the current market value of the shares. Also, if you're over 70.5 years old and have an IRA account, you're going to have to make your required minimum distribution before the end of the year to avoid penalties. However, if that's going to put you in dire straits with the IRS, Lynch says you may want to see if you can give your required minimum distribution directly to the charity of your choice.
Failing all of that, keep in mind that the upcoming season of giving extends beyond charities. Yes, even certain presents are deductible.
“We like to remind clients of the gift tax exclusion: you can give $14,000 per donor without incurring a gift tax,” Greenwald says. “If you want to give money to your kids or you're fortunate enough to have rich kids who want to give money to their parents, you want to make sure you don't miss that at the end of the year, because you can't use this year's exclusion next year.”