Year-End Tax Tips
Ok... now that we're all fat & happy from Thanksgiving it's back to business!
Sometimes it's easy to come up with witty topics to blog about, but heading toward the end of the year has left me scratching my head... Being at such a loss, I asked friends & family about what they'd like to know , not surprisingly, the most recurrent question
was "What can I do last-minute to help on my taxes?"
To compose this list, I did a little research (thanks Google!), used some common sense (for a tax preparer), and I've asked our resident tax pro for a little insight. I found a lot of information, but most of it only applied to a small handful of people, that being said, here is the short list of solutions we've come up with:
1. Take some last-minute tax deductions
What are "Last-minute tax deductions?!?!" Well, there are a handful of things that fall into this category;
*NONE OF THESE MATTER IF YOU DON'T ITEMIZE YOUR DEDUCTIONS*
- Charitable Contributions- Not only do you get those warm, tingly feelings from doing good... but you're also helping out your bottom line. Giving to charity is a great deduction, and you control the timing! You can even supercharge your tax benefits by donating appreciated stock or property rather than cash- If you've owned the asset more than a year you can deduct the market value on the date of the gift AND you avoid paying capital gains on the built-up appreciation.
If you're looking for a worthy cause to donate to; American Cancer Society has helped MANY people I personally know, San Angelo PAWS is a locally run animal shelter, United Blood Services does wonders for people in need, YMCA, Boy Scouts, most of your schools, etc... there is NO shortage of wonderful causes that would be happy to take your money in the area!
*You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.)*
- Make a BIG purchase (car, truck, RV, boat, etc...)- Sales tax on big purchases is deductible on your taxes, so if you've been thinking about it & needed a good excuse, here you go! Make sure that you bring your bill of sale to the tax office so we can get every last penny.
- Pay off doctor's bill- Only medical expenses over 10% of AGI are deductible, so if you've spent a LOT of money one year, get it ALL taken care of so you can deduct it!
- Double up on property tax bill- See below about "Bunching."
If you're on the itemize-or-not borderline, your year-end strategy should focus on "bunching". This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end planning stresses pushing as many deductible expenses as possible into the following year when they'll have more value.
2. Defer (or Accelerate) your income
Income is taxed in the year it is received, so if you are changing tax brackets next year, try to time your pay to coincide with what will benefit you more. As an employee, that's probably not the easiest task, but it never hurts to ask... maybe your employer would benefit from paying your last paycheck a few days later?!?!
Being self-employed, a contractor, or freelancer you have a little more wiggle room to make it work. For example, you could delay billing until late in December in the hopes that people won't pay until 2017.
Whether you are employed or self-employed, you can also defer income by taking capital gains in 2017 instead of in 2016.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that's likely, you may want to accelerate income into 2016 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
3. Watch your flexible spending accounts
Flexible Spending Accounts, or FSA's, are a great fringe benefit some companies are offering to their employees. They avoid both income and Social Security taxes on your side, and payroll taxes on the employers side. These accounts can be used to pay for child care, medical bills, or other expenses as laid out in your plan details.
*Let me clarify, they're great if you know how to budget and keep tabs on how much is in your account. The catch to any FSA is the "Use it or lose it" rule- All funds are forfeited at the end of the year, or grace period, if they aren't used.
With the approaching year end, it would be wise to check how much is in your account, the date the funds need to be used by, and what you can use the money for- it might be time to schedule an eye appointment or get a few months of meds.
4. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2016 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
As with any tax advice, you're best served by talking to a tax professional who knows the in's & out's of your situation and can more specifically advise you on these matters.
Good luck & Happy Holidays!!