2015 Year-End Tax Tips — Warren A. Sidosky, CMA

By Warren A. Sidosky, CMA | December 2, 2015 | warrensidosky@gmail.com

With year-end fast approaching, and while negotiations continue in Congress on extending certain tax provisions, it’s a good time to take some actions now to lower your 2015 income tax bill. Even if a compromise does not come together, it is still likely that the tax extenders will pass for a two-year period with provisions retroactive to January 1, 2015.

Perform a Year-Over-Year Income Analysis. Pull out last year’s tax return and compare it to this year’s projected income from wages, salaries, interest and dividends, business income and capital gains and losses. Is it significantly higher (or lower) and are you having enough taxes (or too much) withheld? If you fail to estimate your income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the government with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time--and possibly owe interest and penalties as well. When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. (You may owe some money at the time you file your return, but it shouldn't be much).
Consider deferring income into next year. Income is taxed in the year it is received. Deferring income postpones the tax bill until next year (or later). While it may be difficult for employees to postpone wage and salary income, if you’re lucky enough to get a bonus, your employer may agree to postpone giving you the check until January. Companies can generally deduct the payment for the current year as long as you receive the bonus within two and a half months after the end of the tax year. If you are self-employed or do freelance or consulting work, you have more flexibility. Self-employed taxpayers can defer income by waiting until January to bill clients. Income may also be deferred by taking capital gains in 2016 instead of in 2015. Keep in mind, however, that it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. While the bracket cutoffs for next year will be just a few dollars higher, thanks to small inflation adjustments, 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 2015 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
Review Deductions. If your qualifying expenses (e.g., home mortgage interest and property taxes, state income or sales taxes, medical expenses, and charitable donations) exceeds $6,300 if you are single, or $12,600 if you're married filing a joint return, itemizing may be more beneficial than taking the standard deduction. If you're on the borderline, your year-end strategy should focus on bunching. If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2015 write-offs may make sense — if your income will be high and if you expect to be in the same or lower tax bracket next year. The goal is to surpass the standard-deduction amount and claim a larger write-off. However, don't carry out this strategy if you expect to be in a higher tax bracket next year. If you'll be in that situation, you may want to claim the deductions that year.
Claim Miscellaneous Tax Deductions & Get More Tax Savings. Even if you claim the standard deduction instead of itemizing, don't overlook adjustments to income to which you may be entitled. Some often overlooked deductions include moving expenses, student tax breaks, purchase of an electric car, and deductible IRA contributions. If you have any investments that have generated deductible losses, you can use the losses to offset any gains.
Claim Capital Gains & Disaster Loss. By claiming gains with disaster losses, you may be able to avoid paying capital gains taxes. If you have more losses than gains, you claim up to $3,000 to offset your ordinary income. Then, you can save the rest of the losses for future tax years. You can claim a disaster loss on your 2015 Tax Return or on an amended 2014 Tax Return. Select the year in which your adjusted gross income was lower so that your disaster loss deduction will give you a greater write-off and more tax savings.
Save Money with a Flexible Spending Account. A "spending" account is different form a "savings" account. You must use up your Flexible Spending Account (FSA) dollars or they disappear. If you still have money left in your FSA at the end of the year, don't let it go to waste. You can still get new glasses or contact lenses, or go see your dentist. New legislation even allows you to buy over-the-counter medications with FSA dollars as long as you have obtained a prescription from your doctor. Be sure to check with your employer to see if they offer a 2 1/2 month grace period in which to spend your flex dollars after the year ends.
Deduct Points for Refinancing Your Home Mortgage. If you refinanced a home mortgage in 2015 and it is a subsequent refinancing (e.g., you have already refinanced the original mortgage used to purchase the home), then points spent on the prior refinancing become fully deductible. (Each "point" equals 1% of the total loan amount).
Make Charitable Contributions. Donating clothing and household goods by the end of the year will allow you to deduct the fair market value of those donations on your tax return. This may result in a bigger refund or reduced tax bill. For all charitable contributions of cash and donations of goods worth over $250, you must have a bank record or written communication from the charity in order to claim the deduction. In addition, you must make sure that the organization is a qualified charity (you can confirm qualified charities with the IRS). To qualify for a deduction on your 2015 tax return, make sure you send any checks in the mail by December 31, 2015. If you're paying by credit card, put the gift on the card before the end of the year and pay the bill in January. Make sure you obtain a receipt for your records (either cancelled check or your credit card statement). If the donation is over $250, you must get a written statement from the charity. If you plan to make a significant gift to charity this year, consider giving stocks or mutual fund shares that you've owned for more than one year. Doing so boosts the savings on your tax return. Your charitable contribution deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.
Deduct Your Vehicle Mileage for Business Use. You might be able to use the actual expense method or the IRS standard mileage rate (57.5 cents per mile for business miles driven, up from 56 cents in 2014) to deduct your vehicle expenses. Actual car expenses include depreciation, licenses, lease payments, registration, fees, gas, insurance, repairs, oil, garage rent, tires, tolls and parking fees. Select the method that gives you the greater write-off. You need proof of the costs incurred for business driving. If you don't have this proof, rely on the IRS standard mileage rate. In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls.
Claim Small Business Tax Deductions. Did you purchase new equipment for your business in 2015? Some small businesses can write off the full cost of some assets in the year they buy them, rather than deducting their cost over a number of years. Section 179 of the Internal Revenue Code allows a business to deduct, for the current tax year, the full purchase price of financed or leased equipment and off-the-shelf software that qualifies for the deduction, up to $25,000. The equipment must be placed into service in the same tax year that the deduction is being taken.
Give Gifts Without Paying Taxes. You can give up to $14,000 to as many individuals as you like before Dec. 31, 2015 without filing a gift-tax return. If you're married, you and your spouse can give up to $28,000 per recipient. If you're contributing money to a 529 plan, you can put up to $70,000 into the plan tax free and frontload the plan for five more years.
Keep Track of Retirement Plan Contributions. You should try and max out your 401k contributions by the end of the year. The limit is $18,000 ($24,000 if you’re aged 50 and over). Any dollar amount you contribute to your 401k or similar employer-based retirement plan (other than a Roth) is excluded from your income and lowers your tax bill. If you have a traditional individual retirement account (IRA), your contributions, up to $5,500 ($6,500 if you’re aged 50 and over) are tax deductible. However, you'll owe income taxes on any withdrawals. If you have a Roth IRA, you can invest money after taxes are taken out, and your withdrawals are 100% tax free. You have until next April 15th to fund a traditional or Roth IRA for 2015. However, the sooner you save the more time you'll have to gain benefits of tax-deferred growth.

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