It’s that time again to examine the moves you need to make to increase your net income and save on your tax bill for 2015 and beyond. It’s really important to start now and review all the opportunities that can save you money, since in most cases (for personal taxes, not business), December 31st is the deadline for adjustments. Doing your year end tax planning now means you can claim these benefits when you file your return by April 15th. If you itemize your deductions, many of these actions should look familiar, so let’s begin!
10 Year End Tax Planning Moves to Save Money
- Take a good look at your last tax return (2014) and see if there’s any opportunities you may have missed, erred on, or can carry over for 2015. If you made a mistake, it’s not too late to amend your return. Double check your W-4 forms (or your quarterly tax payments if self-employed) to adjust any withholding so your regular paychecks give you the right amount of income.
- Charitable donations such as cash, stocks, bonds, clothing, furniture, appliances, and food need to be made before year end to be deducted from your 2015 income.
- Make sure you are maxing out your retirement plan contributions (401k or any approved plan, even IRA CD’s) before the tax deadline. Yes, you do have until April to do this one, but remember that the sooner you do it, the sooner your money starts to grow, so don’t wait until the last minute. If you’re under age 50, you may contribute up to $5,500 for 2015 and if you’re over 50, it’s $6,500 that may be deducted from your gross income.
- If you have an FSA (Flexible Spending Account) through your employer, make sure you are using it all (up to $2,550 is allowed each year) before year end or you may lose any remainder. There are some exceptions to extend the deadline for a few months or carry over a small amount, but that’s an employer option and in the FSA agreement you may have, which is not commonplace. Don’t confuse FSA’s with HSA’s (Health Spending Account)…HSA’s roll over to the next year.
- If you are required to take a distribution from an IRA plan (minimums are a must for people 70½ years old), you must do so by year’s end or suffer a tax penalty of up to 50% of the amount!
- You may be able to defer income until January and increase expenses for December for tax purposes. Doing so will lower your taxes now if your 2015 income is expected to be greater than next year’s or if you have another needed reason to save this time around. Examples include a year-end commission or bonus which may be deferred by a few days to save, or paying your January mortgage payment on December 31st instead of January 1st.
- If you’re a parent or a grandparent, you can set up a 529 Plan (College Tuition Savings Plan) before the end of the year. The contributions are Federal tax deductible (and in some states as well) and go toward paying college costs when you need them. Check details online or consult a financial advisor right away.
- It is the time of the year for giving gifts! This year you may gift up to $14,000 to any individual you’d like (or $28,000 to a tax-filing couple) and although it’s not a tax deduction, it will save the receivers any tax on that gift. This may save future estate taxes by gifting money now rather than passing it on as an inheritance later.
- Consider converting your IRA from a traditional to a Roth IRA (there is no cost to do this) if your tax bracket projects the need to have untaxed income when you are 59½ years old or retired. When you are retired, you may not have as many ways to reduce your taxes through deductions. In a perfect scenario, you may be able to avoid the taxes contributing to the Roth plan while working and be tax free when you begin withdrawing after age 59½.
- Plan to file your taxes online! It’s really very easy with clear instructions and explanations to guide you along. Spend a little time now researching the different sites and you may be able to skip the accountant or other tax preparation professional. You may be eligible to file for free based on income (adjusted gross income for the household must be under $58,000), but everyone can save in comparison to an accountant since in most cases the online fees are only $10-$25. Plan to e-file and have any refund deposited directly into your bank account. It’s easy and the site will walk you through each entry. Of course if you have a particularly complex financial situation, you may benefit from the advice of a tax professional.
And one more thing to note…
When it comes to tax returns, I am appalled when I hear that people have a smile on their face because they get a large refund check from the government each year. This simply means they have overpaid their taxes through their paycheck on a regular basis. The goal of your tax bill should be to pay what you are required to pay and no more. In my world, that means planning ahead on your income and deductions so that you owe no additional taxes and receive little to no refund at tax time. In reality, a refund check is your own money given back to you with no interest because you’ve loaned the government your money all year for free. Does that make any sense? I know some people have highly unpredictable incomes and would rather cover their bases, but for the majority of us, there’s no good reason to get a large tax refund when you could be saving or investing that money all year long.
By starting your tax planning now, you’ll be ready in the new year to take advantage of every opportunity to save on your taxes. Don’t let the time, and your money, go to waste!
So what’s your strategy for your 2015 taxes and beyond?
Image courtesy of 401kCalculator.org (with changes)