With year-end around the corner most people are far more focused on holiday shopping rather than on reducing their tax liability. But the fact is that unless you make tax saving moves before year end, you may end up paying Uncle Sam (a.k.a the IRS) a lot more than you legally have to when you file your return in the new year. So be smart and save more with one or more of the following year-end tax saving tips.
A number of smart tax moves are well known, such as contributing to tax-advantaged retirement plans (e.g 401K) and making charitable contributions, but it always amazes me how many people forget to do these and leave free money on the table. Also don’t forget that with the Affordable Care Act (ACA) has tax implications and penalties you may not even realize.
Take or “Harvest” those capital losses. It’s been a decent year for the stock market and if you have or are planning to sell stock this year you could liable for a big capital gains hit. Other than not selling the other thing is to sell the turkeys in your investment portfolio (yes we all have them!) and offset the gains with losses. Even if you are unfortunate enough to have no gains, you can still write of $3,000 of capital losses against your regular taxable income. Off course any decision to sell capital assets should be based on economic fundamentals, together with your investment goals; however, you should definitely consider the tax aspects and transaction costs associated with disposing of capital assets.
Contribute to an IRA and Max out your 401K. This is really a no-brainer if you want to make a significant impact on your taxable income and save for the future. You can open and make a deductible IRA contribution as late as April 15 next year provided you meet the income requirements. Contributions to your 401(k), 403(b), or similar workplace retirement plan must however be made by year end to impact your current year taxes. Alternatively, if you can’t make a deductible IRA or 401K contribution, you may still be able to contribute to a Roth IRA (subject to income limits). Although a Roth IRA is not tax deductible, your contributions won’t be taxed again when you withdraw the money and its earnings, presumably in retirement. For Roth IRA and Traditional IRA accounts you do have until April 15 of the following year to open an IRA and make a deductible contribution for the prior year.
Fund College Expenses for Your Child or Grandchild. Contribute to a 529 college savings plan for your child or grandchild and you may reap some state income tax benefits. You’ll also ensure tax-free withdrawals from the plan to pay for future college costs. In addition, direct payments to an institution for educational or medical purposes are not subject to gift tax limitations.
Out-of-pocket charitable contributions. It’s easy to overlook the charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity, remember to deduct the IRS allowed standard mileage rate deduction. You must however maintain adequate records for all cash contributions if claiming the deduction. This means retaining receipts from the charity, a canceled check or an official bank statement containing the name of the charity, the date, and the amount.
The one source of confusion comes from those who believe that 100% of charitable giving is deducted when in fact the percentage of deduction is based on your tax rate. This is why charitable giving is certainly a tax advantage but it is still recommended that giving be done for more “charitable purposes” rather than financial reasons.
Claim the Earned Income Tax Credit (EITC). Millions of lower-income people miss out on this every year because they don’t realize they are eligible or the rules are too complicated. The EITC is a refundable tax credit – not a deduction. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class” – including many white-collar workers – are now considered “low income” because they lost a job, took a pay cut, or worked fewer hours last year.
The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file for a tax refund, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.
Refinancing points. When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?
Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.
Same Sex Couple tax breaks. With the various legal rulings over the status of same sex marriages, many couples now have the option to jointly file federal income taxes and, in many cases, state income taxes. If you think you might file jointly with the new rulings you should evaluate your situation before the end of the year to optimize your tax strategies and maximize your deduction. This area can get a bit tricky so consult a tax professional to navigate the grey areas.
Establish a Health Savings Account. Taxpayers with high-deductible health plans who are not covered by any other health insurance or enrolled in Medicare may deduct contributions to a health savings account (HSA). HSA distributions are not taxable if you use them to pay for qualified medical expenses including deductibles and co-payments, over-the-counter drugs, long-term care insurance, and health insurance premiums or medical expenses during a time of unemployment. HSAs also provide triple tax savings: Contributions are tax-deductible, earnings on the account are tax-free, and withdrawals for qualified medical expenses are also tax-free. The account goes with you if you change jobs or move, and unused money in the account may be used in future years.
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