Everything You Need to Do at the End of the Year to Optimize Your Taxes for 2015
This is supposed to be the most beautiful time of the year, so taxes are probably the least to think about. It’s not the most fun activity between sipping an egg gogol and packing gifts, but if you can squeeze in some tax measures by December 31st, it makes the April tax season a lot less of a headache. Here are a few year-end steps to take to get the most out of your 2015 taxes and stay organized.
Optimize your deductions
Deductions are one of the few things you can count on when it comes to your taxes. You can deduct everything from home office to tax preparation fees, and with a little work, you can ensure that you get the most out of those deductions. Fidelity’s Kristen Robinson , Senior Vice President, Women and Young Investors, suggested:
Charitable donations are an effective way to reduce taxable income when you file your tax returns. If you were looking to make a donation and would like to lower your tax bill for 2015, be sure to pay the donation by December 31st. Now is also a good time to clean up your closet or basement and donate clothes and household items. Don’t forget to get receipts for non-cash donations .
But it’s not just your old coats and kitchen appliances: you can donate cash and get a deduction. Of course, the amount you can deduct depends on the fair market value of what you donate. The IRS has several rules for deducting charitable donations , and those rules basically boil down to donating to a “qualified organization” and keeping a record of your donation. A qualified organization is pretty straightforward, but the IRS details what makes the difference here .
Do a little research before giving. For example, the Charity Navigator lets you search for organizations and then let you know how much your donation will actually go to those in need. Again, make sure you get a receipt for every charitable deduction . And if you volunteer, you won’t be able to deduct your time, but you can deduct miles and pocket money, so keep and keep receipts for them.
Another way to get tax credit for charitable donations is to donate your investment . When you donate your investment to charity, you are exempt from paying taxes on it. The Motley Fool explains :
… the charity takes over the stock and then sells the stock itself, and since the charity is a tax-exempt organization, it has no tax liability on the sale. shares are eligible for long-term capital gains, you are allowed to deduct the full market value of the shares at the time of donation. This gives you a deduction even from the amount of profit on which you avoided paying capital gains tax, which essentially gives you a double tax benefit on the gift.
Of course, you are still giving away the money, since the amount you owe in taxes will not be as large as you would have earned from the investment. But if you want to donate to charity anyway, this is a good way to do it and get your tax credit at the same time.
And thanks to the IRS Mortgage Interest Deduction, you can deduct the interest paid on your monthly mortgage loan. And if you want to squeeze out another month, now is the time to do it. “Make your mortgage payments for January through December 31st and you can deduct interest for 2015,” suggests Kay Bell of Bankrate . Make your property tax payments now so they can be deducted too.
If you’ve been thinking about buying something for your business or home office , you might want to do those purchases before the end of the year. This will result in more write-off for home office expenses in April.
Get ready for the red flag
As you take stock of the year, it is also helpful to know about IRS red flags for auditing. For example, large charitable donations are a big red flag for the IRS, so if you are making a large donation, you will want to be very careful to get your receipt and documentation, just in case.
Home office deductions are also a lot of worries, so if you’re planning to write off any home office expenses – from stationery to new computer equipment – start collecting receipts for them now. Here are a few other IRS red flags to be aware of :
- Business Losses and Schedule C : If you have had a business for three years but are still reporting losses, your chances of being audited increase.
- Obtaining Tax Credit on Earned Income : This is often abused, which is why the IRS is especially vigilant about this. If you are planning to qualify for the EITC, please read the IRS guidelines and double check if you qualify.
- Earning over $ 250,000 a year: If you are making good money, you want to be especially careful about keeping records.
If you are worried about due diligence , you might want to start an audit by a professional tax preparer now. Tax specialists are very busy from January to April.
Boost your retirement savings
If you have a tax-deferred retirement account such as a traditional IRA or 401 (k), you can deduct the money you save in that account from your taxable income for the year. It’s a good idea to save for retirement anyway; the tax advantage is just a bonus. Robinson said:
This is your last chance to contribute to your annual workplace pension plan, such as 401 (k) or 403 (b). However, you need to act quickly to get your 401 (k) contributions recorded on your 2015 tax return by December 31, 2015. The maximum amount you can deposit this year is $ 18,000 ($ 24,000 if you are over 50). ). Also consider participating in a Roth or traditional IRA. No time like the present, but you have time for it – you can make contributions to IRA accounts up to the April 15, 2016 tax filing deadline.
While you may have until next April to contribute in 2015, if you do it now, you won’t put off until it’s too late. Plus, the sooner you start investing, the better. Even if you can’t hit the limit, putting off just a little can help offer a small tax break next year. Just don’t go overboard, because that can lead to a fine .
Depending on how much you earn, you may also be eligible for a retirement loan . This is basically the cashback you receive from the IRS for the amount you have saved in your retirement accounts. For example, if you are married and filing together and earn between 39,501 and 61,000 with your spouse, you can expect to receive a loan equal to 10% of what you saved up for retirement. Here are the full 2015 income limits and loan size, according to the IRS:
Whether it’s these loans or your tax-deferred account, hoarding a few extra nuts in your retirement account can save you a few dollars in April.
If you get a refund, please fix it.
Getting money back from the government is great, but it also means you overpay throughout the year. It’s not such a big deal as many people like to say, but if you’d rather have that money in your pocket for a year (who wouldn’t?), It’s easy enough to fix your refund .
You just need to update your W-4 and adjust the amount of benefits required. In general, getting your money back means that you are not claiming enough benefits. TurboTax has a handy retention calculator that lets you play with the numbers to find out how many benefits you want to claim. From there, it’s as simple as filling out a new form and sending it to your employer.
Reduce your taxable income
You will eventually have to pay taxes on the money you make, but if you are afraid of your 2015 tax bill, one way to keep it down is to reduce your Adjusted Gross Income (AGI) for the year.
Obviously, you can’t just adjust your paycheck, but if your boss plans to give you a bonus at the end of the year, you might consider asking if they can postpone it until January. One of my old employers even asked us if we would prefer to do this to avoid the tax hit, and that was good. If you are a freelancer or self-employed, you might consider moving your invoices to January if your clients don’t mind.
If you are self-employed, freelance, or consultant, you have more leeway. For example, deferring billing until the end of December can ensure that you don’t receive payment until next year.
Beware of the alternative minimum tax
There is another reason for the decline in Adjusted Gross Income: the Alternative Minimum Tax (AMT ). If you earn less than $ 53,600 (for individual applicants), you are exempt from AMT and you have nothing to worry about. But if you fall into that box , you need to pay attention. AMT is a separate tax that uses its own tax rate and calculation. If your income exceeds the threshold , you can pay a higher AMT rate instead of the normal taxable income rate.
MarketWatch offers one way to avoid AMT by lowering Adjusted Gross Revenue:
Consider selling some of the losing investments held in tax-deductible brokerage firms. You can use capital losses to offset capital gains that lower your [Adjusted Gross Income] and your AMT exposure. Any losses on residual capital up to $ 3,000 are deducted from taxable income from all sources. Thus, your exposure to AMT is further reduced.
On the other hand, if you sold any investment for capital gains this year, it could increase your adjusted gross income and qualify you for AMT. So this is something you should keep in mind when it comes to your investments before December.
However, keep in mind that by decreasing your AGI, you are simply putting it off until the next year. So next year, you may have to pay an even bigger tax bill if that amount of deferral pushes you to a higher level.
Order tax forms
If you are self-employed or own your own business, you may need forms that you need to complete by the end of the year. A typical example is the 1099s. If you hired contractors or subcontractors in 2015 and paid them more than $ 600, you will need to complete and submit Form 1099-MISC .
You have until January 31st to submit them, so you want to order the forms now if you haven’t already.
Avoid the Health Insurance Penalty
The penalty for not having health insurance will increase next year (it will be 2.5% of your income ), so if you are in charge of registering with your own health insurance , you will want to do so by January 31, 2016. to avoid the 2016 tax penalty. If you want coverage to start on January 1st, you must register by December 15th. If you did not have health insurance in 2015 and are facing a fine, you can use this tool to see if you qualify. for exclusion .
Robinson also recommends checking your flexible spending account. Generally, you must use the money in your FSA for medical expenses by the end of the year, or you will lose it. The rules changed last year and you can carry over $ 500 with you, but employers are not required to abide by this rule, and many do not. Some FSA plans instead give you a grace period to use up your account money. Either way, you want to learn the rules of your FSA right now.
The end of the year is fast approaching, and yes, you have until April before you really start worrying about taxes. However, the sooner you start thinking about them, the better. These tips will help you optimize your tax preparation and streamline the entire process.