There are just a few weeks left in December! And, while your mind might be filled with holiday parties and gift shopping, this is also the time of year to tie a neat little bow on your financial picture so that you’re not kicking yourself in 2016.
You can start here: Consider the tax impact of 2015 transactions.
- Did you sell real property this year?
- Did you start a business?
- Have you exercised a stock option?
- Could any large commissions or bonuses come your way before January?
- Did you sell an investment held outside of a tax-deferred account?
Any of this might significantly affect your 2015 taxes. So, here are some strategic ways to offset your earnings.
#1 Make a charitable gift before New Year’s Day. You can claim the deduction on your tax return, provided you itemize your 2015 tax year deductions with Schedule A. The paper trail is important here.1
If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2015 ends, you can only deduct $500.1
Are you gifting appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the investment and then donating the proceeds. (Of course, if your investment is a loser, it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equal to the proceeds.)2
Does the value of your gift exceed $250? If you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.1
If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.
#2 Contribute more to your retirement plan. If you haven’t turned 70½ this year and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can cut your 2015 taxable income through a contribution. Should you be in the 35% federal tax bracket, you can save $1,925 in taxes as a byproduct of a $5,500 regular IRA contribution.3,4
If you are self-employed and don’t have a solo 401(k) or something similar, look into whether you can still establish and fund such a plan before the end of the year. For the tax year 2015, you can contribute up to $18,000 to any kind of 401(k), 403(b), or 457 plan, with a $6,000 catch-up contribution allowed if you are age 50 or older. Your 2015 contribution to a Roth or traditional IRA may be made as late as April 15, 2016. There is no merit in waiting, however, since delaying your contribution only delays tax-advantaged compounding of those dollars.4,5
#3 See if you can take a home office deduction. If your income is high and you find yourself in one of the upper tax brackets, look into this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. (The percentage of costs you may deduct depends on the percentage of the square footage of your residence you devote to your business activities.) If you qualify for this tax break, part of your rent, insurance, utilities and repairs may be deductible.6
#4 Practice tax loss harvesting. You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. In fact, you can use this tactic to offset all of your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2016 (and future tax years) to offset ordinary income or capital gains again.8
Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women. As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.
Sources:
1 – irs.gov/uac/Newsroom/Six-Tips-for-Charitable-Taxpayers [5/19/15]
2 – philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]
3 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]
4 – turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/4-Last-Minute-Ways-to-Reduce-Your-Taxes/INF22115.html [10/20/15]
5 – forbes.com/sites/ashleaebeling/2015/10/21/irs-announces-2016-retirement-plans-contribution-limits-for-401ks-and-more/ [10/21/15]
6 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction [10/16/15]
7 – bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [10/7/15]
8 – fidelity.com/viewpoints/personal-finance/tax-loss-harvesting [9/9/15]