As another year draws to a close, the tax moves you make, or don’t make, can have a significant impact on your 2015 tax return. Fortunately, there are plenty of tax-saving opportunities available to individual taxpayers, even if certain tax provisions are not resolved until the waning days of the year. Here are seven ways you may be able to reduce your tax bill for 2015.
1. Harvest capital gains or losses. Typically, you might realize capital gains or losses from sales of securities that can offset each other at year-end. The maximum tax rate on net long-term capital gains is only 15% (20% for those in the top 39.6% bracket). Conversely, capital losses offset gains plus up to $3,000 of ordinary income in 2015. Note: A 3.8% surtax on net investment income (NII) may also apply to capital gains.
2. Claim tax rewards for generosity. Generally, you deduct the full amount of cash or cash-equivalent gifts made to qualified charities, assuming you keep the proper records. Also, you may deduct the fair market value of gifts of appreciated property if certain requirements are met. However, special limits often apply, including a possible reduction in deductions for certain high-income taxpayers.
3. Watch out for the alternative minimum tax (AMT). Despite recent increases in exemption amounts for the AMT, many taxpayers are still trapped by this “stealth tax.” Generally, the AMT applies if you have an overabundance of tax preference items, especially if you reside in a high-tax state. Have a review of your AMT liability conducted to determine if you should shift income items or deductions at year-end.
4. Prepay state and local income taxes. Absent other circumstances, the conventional wisdom is to reduce your current income tax bill whenever possible. Therefore, you might arrange to prepay any state and local income taxes due on January 15, 2016, before the end of the year. As a result, you can increase your deduction for state and local taxes in 2015.
5. Bunch elective medical expenses. For 2015, the threshold for deducting medical expenses for most taxpayers is 10% of adjusted gross income (AGI), although it is 7.5% of AGI for those age 65 or older. If you have a chance at a deduction for 2015, try to move elective expenses, such as dental cleanings and physical examinations, to this year. Otherwise, you might as well postpone those expenses until next year.
6. Split income with family members. When appropriate, transfer income-producing property to low-income-tax-bracket family members. They may benefit from a 0% rate on long-term capital gains for taxpayers in the two lowest ordinary income tax brackets. Reminder: Under the kiddie tax, unearned income above $2,100 received in 2015 by a dependent child under age 19 or a college student under age 24 is generally taxed at the parents’ top tax rate.
7. Lock in education tax break. If you are sending a child to college, you may be able to claim either one of two higher education credits, subject to phaseouts at certain income levels. Previously, you also had an option of a tuition deduction, subject to a phaseout, but this tax break technically expired after 2014 and is currently in limbo. In any event, pay qualified expenses in 2015 to maximize any available tax break.
Depending on your situation, one or more of these strategies may make sense for you. Schedule a meeting to discuss your personal needs.