As we approach the end of the year, the tax moves that you make-or don’t make-can have a significant impact on your 2015 tax return.
Many physicians wait until March or April to start focusing on the previous year’s taxes and tax reduction. Unfortunately, many tax savings opportunities have to be accomplished by the end of the 2015 calendar year, not next April. Proactive planning prior to the end of the year can help reduce your tax bill, leaving you with more money to meet your financial goals.
As we approach the end of the year, the tax moves that you make-or don’t make-can have a significant impact on your 2015 tax return. Fortunately, there are plenty of tax-saving opportunities available to individual taxpayers, even if certain tax provisions are not resolved until the waning days of the year. Here are seven ways you may be able to reduce your tax bill for 2015.
Harvest capital gains or losses. Typically, you might realize capital gains or losses from sales of securities that can offset each other at year-end. The maximum tax rate on net long-term capital gains is only 15% (20% for those in the top 39.6% bracket). Conversely, capital losses offset gains plus up to $3,000 of ordinary income in 2015. Note: A 3.8% surtax on net investment income may also apply to capital gains.
Make charitable contributions. Generally, you deduct the full amount of cash or cash-equivalent gifts made to qualified charities, assuming you keep the proper records. Also, you may deduct the fair market value of gifts of appreciated property if certain requirements are met. However, special limits often apply, including a possible reduction in deductions for certain high-income taxpayers.
Be cautious of the alternative minimum tax (AMT). Despite recent increases in exemption amounts for the AMT, many taxpayers are still trapped by this “stealth tax.” Generally, the AMT applies if you have an overabundance of tax preference items, especially if you reside in a high-tax state. Have a review of your AMT liability conducted to determine whether you should shift income items or deductions at year-end.
Next: Prepay state and local income taxes
Prepay state and local income taxes. Absent other circumstances, the conventional wisdom is to reduce your current income tax bill whenever possible. Therefore, you might arrange to prepay any state and local income taxes due on Jan. 1, 2016 before the end of the year. As a result, you can increase your deduction for state and local taxes in 2015.
Combine all elective medical expenses. For 2015, the threshold for deducting medical expenses for most taxpayers is 10% of adjusted gross income (AGI), although it is 7.5% of AGI for those age 65 or older. If you have a chance at a deduction for 2015, try to move elective expenses, such as physical examinations, to this year. Otherwise, you might as well postpone those expenses until next year.
Split income with family members. When appropriate, transfer income-producing property to family members who are in a low-income tax bracket. They may benefit from a 0% rate on long-term capital gains for taxpayers in the two lowest ordinary income tax brackets. Reminder: Under the “kiddie tax,” unearned income above $2,100 received in 2015 by a dependent child under age 19 or a college student under age 24 is generally taxed at the parents’ top tax rate.
Lock in education tax breaks. If you are sending a child to college, you may be able to claim either one of two higher education credits, subject to phase-outs at certain income levels. Previously, you also had an option of a tuition deduction, subject to a phase-out, but this tax break technically expired after 2014 and is currently in limbo. In any event, pay qualified expenses in 2015 to maximize any available tax break.
Depending on your situation, one or more of these strategies may make sense for you. Be sure to consult with your tax adviser prior to the end of the year to determine whether there are any proactive tax strategies that you can implement for your own specific benefit.
Next: What are the advantages of creating a private foundation?
With this strategy, you make contributions to a foundation and get a charitable tax deduction just as you would with any qualified charitable organization. Then, as the director, you get to decide which charities you want to make distributions to while still retaining control of the assets. Other advantages include reduced future estate and income taxes since you no longer own the contributed property. In addition, after your death, your children and grandchildren can take over as directors of the foundation.
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