The good news is that there still are some tax breaks on the books that you can use to your advantage before the end of 2015.
Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Following are 10 year-end tax moves to make before New Year's Day.
10 tax moves to make now
- Bunch your deductible expenses.
- Add to or open an IRA.
- Be generous to charities.
- Pay college costs early.
- Check health insurance.
- Defer your income.
- Add to your 401(k).
- Review your FSA amounts.
- Harvest tax losses.
- Make the most of your home.
1. Defer your income
The top tax rate is 39.6% on taxable income of more than $406,750 for single taxpayers; $457,600 for married couples filing joint returns ($228,800 if filing separately); and $432,200 for head-of-household taxpayers. If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you're self-employed, don't send out invoices for year-end jobs until early 2016.
This strategy works even if you're not in the top tax bracket, but just about to cross into the next higher one.
2. Add to your 401(k)
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you'll have a bit less income that the IRS can touch. (Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth.) Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.
Few of us will reach the maximum $18,000 that employees can stash in a 401(k) this year, but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $6,000.
In most cases, you can modify your 401(k) contributions at any time, but double-check with your benefits office to be sure of your plan's rules.
3. Review your FSA amounts
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you don't waste it. You can contribute up to $2,550 to an FSA via paycheck withdrawals. If that limit seems lower, you're right. As part of the Affordable Care Act the maximum contribution amount was set at $2,500 with annual adjustments for inflation; before the health care law change, there was no statutory limit.
As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you lose it. Some companies allow a grace period into the next year to use the untouched FSA funds, but not all. And though the U.S. Treasury recently announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to take steps to adopt it.
Be sure to check with your employer, and if you must use your FSA money by Dec. 31, make sure you do.
4. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8% Net Investment Income Tax. This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.
If you do face the 3.8% surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.