The Early Bird Gets the Tax Savings

Aug 18, 2015

You may be thinking more about raking leaves than reviewing your taxes. After all, your 2015 income-tax return isn’t due to the IRS for several months. However, waiting too long can rob you of the opportunity to use planning strategies to help reduce your tax bite. Here are a few suggestions of some areas for review.

Paying Less by Saving More

You may be able to lower taxes by increasing your pretax contributions to an employer-sponsored retirement plan. Since you don’t pay current taxes on the money you contribute, deferring a greater amount of your pay means less money is withheld for taxes. If you’re age 50 or older and are already contributing the maximum annual amount through salary deferrals, your plan may allow you to make catch-up contributions.

Another strategy is to contribute to a traditional individual retirement account. Contributions made by the April tax-filing deadline may be deductible on your 2015 return. The 2015 contribution limit is $5,500 ($6,500 if you’re age 50 or older). Talk to your tax advisor about the deduction requirements.

Being Charitable

Making donations to your favorite charitable organizations by the end of the year positions you to claim an itemized deduction for charitable contributions. Donating with a credit card or with a check mailed by December 31 allows you to take the deduction on your 2015 return even though you won’t pay your credit card bill or have your check processed until 2016. Verify that the organization qualifies to receive deductible contributions. Remember to keep your receipts and bank/credit card records as proof of your donations. Deduction limits apply.

Losses You Can Use

Until you actually sell an underperforming investment, your “losses” are only on paper. Reviewing your taxable portfolio for investments that haven’t performed the way you expected them to may turn up potential “sell” candidates. A short period of lower values doesn’t necessarily make an investment a poor choice. But an investment that has lost value since you acquired it and consistently underperformed a benchmark may need another look. Selling the investment would give you a capital loss you can claim for tax purposes. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married, filing separately). Any losses you can’t deduct can be carried over for deduction in future years, subject to the same limitations.

Favorable Rates, More Profit

If you’ve been thinking of taking profits on appreciated stock you’ve held longer than one year, favorable capital gain tax rates may make this a good time to sell. Long-term capital gains from the sale of stocks and other securities are currently taxed at 15% for most taxpayers. The exceptions: Gains are taxed at 0% for taxpayers in brackets below 25% and at 20% for taxpayers in the top regular tax bracket (39.6%).

Now remember those losses you incurred by selling your underperforming investments? You can use them to offset your gains from the sale. Never make taxes your only reason for selling an investment. Before you decide, consider how the sale will affect your overall portfolio.

Bunching Expenses

You may be able to exceed the floor amount for medical deductions by scheduling and paying out-of-pocket medical costs before year-end. For 2015, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income (AGI) or 7.5% of AGI for taxpayers age 65 or older.

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