This is an excerpt from Intuit’s top eight year-end tax planning tips…
1. Defer your income
It's tough for employees to postpone wage and salary income, but if you are self-employed or do freelance or consulting work, you have more leeway. Delaying billing until late December, for example, can ensure that you won't receive payment until the next year. Ranchers may be able to defer livestock sales. Whether you are employed or self-employed, you can also defer income by taking capital gains in 2016 instead of in 2015.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that's likely, you may want to accelerate income into 2015 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later. If you are thinking about deferral, please contact our office to ensure you meet the requirements.
2. Take some last-minute tax deductions
Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year. Contributing to charity is a great way to get a deduction. And you control the timing. You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash. But remember, you must have a receipt to back up any contribution, regardless of the amount.
Other expenses you can accelerate include an estimated state income tax bill due January 15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up deductions could be a blunder if you're subject to the alternative minimum tax, as discussed below.) First, just make sure you'll be itemizing for 2015 rather than claiming the standard tax deduction.
3. Beware of the Alternative Minimum Tax
Sometimes accelerating tax deductions can cost you money… if you're already in the alternative minimum tax (AMT) or if you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class. The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT. State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2015, don’t pay the installments that are due in January 2016 in December 2015.
4. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar. And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2015 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.