By Mandi Woodruff
Now is the time to maximize your tax saving strategies before we officially say adios to 2015. We tapped a few experts for their favorite year-end tips:
Contribute to your 401(k) or IRA. Making a tax-deductible contribution to your IRA is one of the best ways to shelter your income from federal taxes, says Theresa Shea, a certified public accountant and professor of accounting and taxation at Widener University School of Business Administration. Not only do you reduce your total taxable income, you’re also bolstering your nest egg and allowing that money to grow tax-free until retirement. The 401(k) contribution limit for 2015 is $18,000.
Sign up for a health plan. The penalties for individuals who didn’t have health care in 2015 are three times higher than last year. You’ll pay whichever is higher: 2% of household income or $325 per adult and $162.50 for children under 18. You’ll have to declare whether you had health insurance when you file your taxes in April. Some people will be exempt from these penalties, if, for example, they lost a job, filed bankruptcy, or were evicted.
Buy equipment for your business. If you own your own business, you can deduct up to $500,000 worth of equipment expenses on your 2015 taxes. “Business owners can buy equipment at the end of the year, even computers and phones, if they haven’t used the full amount,” says Michael Eisenberg, a CPA in Encino, Calif.
Transfer stock to a Charitable Remainder Unitrust. This is a favorite tax saving strategy of the wealthy (who could forget the great Mitt Romney CRUT scandal of 2012?). If you sold stocks that have seen major gains in a given year, you can avoid taking a big capital-gains tax hit by opening up a Charitable Remainder Unitrust (CRUT), Eisenberg says. You assign a beneficiary (that person can be yourself, a relative, a friend, etc.) and can earn income from that trust each year, like an annuity. This distribution starts at a minimum of 5% and maxes out at 50% a year. When the beneficiary dies, the remaining funds are donated to a designated charity.
Make the most of bad investments. If you own stocks that have depreciated in value since you bought them, you can sell them at a loss and use those losses to reduce or eliminate capital gains taxes from winning investments -- a process called tax loss harvesting. Just beware of the 30-day wash rule. The rule prevents greedier investors from taking advantage of tax loss harvesting by selling shares at a loss, securing the tax benefit, and then buying back the same company’s stock afterward. You have to wait at least 30 days before purchasing the same shares if you sold them at a loss, Eisenberg says. The wash rule also applies to mutual funds and ETFs. If you sell shares in one ETF at a loss and buy an ETF that tracks the same index, for example, you could trigger the wash-sale rule. There's a way to get around the wash rule in this case, however: you can sell and buy back a mutual fund or ETF with similar investments so long as you purchase funds from a different "family", Eisenberg notes. For example, you could sell a Vanguard fund that tracks the S&P 500 and purchase shares in a Charles Schwab fund that tracks the S&P 500 as well. It's all a little confusing, to be sure. To find out if tax loss harvesting makes sense for you, talk about it with your CPA or financial adviser for your year-end portfolio checkup.
Prepay your mortgage. Since the interest you pay on your mortgage is tax deductible, you can maximize your tax deductions by pre-paying your January mortgage. Just keep in mind that making an extra payment in 2015 means you’ll have to make another early payment in 2016 in order to keep that benefit rolling from year to year. So Eisenberg cautions homeowners from using this strategy without input from a financial advisor or CPA. “You have to look at your financial situation and determine if it might make sense for you,” he says. “If you don't do it every year, the benefit is not there every year.”
Ask your employer to defer your bonus until next year. If you’re scheduled to get an annual bonus in December, asking your employer to defer it until the new year can lower your taxable income for the current year. However, like making an early mortgage payment, this is a strategy that only works if you remember to do it each year. “Should you defer your bonus in 2016 and then you get another bonus next December, boom, you’ve got two bonuses on your 2016 income,” Eisenberg says. Another reason to defer your bonus: You’ll have a guaranteed source of cash to help pay off any lingering credit debt incurred during the holidays. Of course, not all employers may be willing (or able) to shift the disbursal of your bonus, but it can’t hurt to ask.