23 Year-end Tax Tips That Can Save Families Thousands of Dollars!

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Family-730320_1920Many wage-earning taxpayers with children believe that since they are not in business or don’t own rental properties, their tax-planning opportunities are limited.  While they don’t have anywhere near as many options, there are still a number of strategies that they can employ to cut their tax liability.  Here are a few of the bigger ones:

  1. Maximize your 401(k) contribution.  This is one of the best tax planning tools for wage earners.  At a minimum, try to contribute at least the amount needed to achieve the maximum employer matching.
  2. Be sure to maximize the credit for the first four years of college.  The American Opportunity Credit reduces your tax by up to $2,000.  If your student just started this fall, consider paying the spring tuition this December in order to maximize the deduction.  This credit phases out when your income reaches certain income levels:  $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly.  You can still qualify for the Lifetime Learning Credit if your student has already claimed the American Opportunity Credit for four years.
  3. In a low-income year, consider converting your regular IRA to a Roth IRA for very little tax cost.  Future distributions from Roth IRAs will be non-taxable rather than taxable.
  4. Assuming you can afford it, increase contributions up to the maximum for IRAs, 401Ks, or self-employed retirement plans.
  5. If you itemize deductions, consider cleaning up your garage, closets, and security sheds and make a donation to Goodwill or a similar charitable organization.  The items donated must be in good or better condition.  Make sure you get a receipt, and I would highly recommend taking pictures to support the deduction.
  6. An option to donating household goods is to sell them at a yard sale.  Since the items sold are usually sold below their original cost, the proceeds will be tax free.
  7. If you itemize, prepay medical expenses by year-end.  This year you can only deduct the amount that exceeds 10 percent of your adjusted gross income (AGI).  You can charge your medical expenses to a credit card and claim the deduction this year, even if you don’t pay the bill until next year.
  8. Track your medical and contribution mileage.  You can deduct 23 cents per mile driven for medical purposes and 14 cents per mile driven for in service for charitable organizations. The key to deducting mileage is maintaining proper records.  Be sure that your log is prepared at the time you drive.
  9. If you are just falling short of the itemized deduction levels ($6,300 for singles and $12,600 for married couples) consider bunching your deductions so that you itemize in one year and use the standard deduction in the following year. This can be accomplished by paying one year’s property tax in January and the next year’s property tax in December of the same year.  Then pay your medical expenses and contributions mainly in the same year that you double up your property taxes.
  10. Pay property taxes in December rather than January in order to get a double deduction this year.
  11. If you are going to buy a car in early 2016, consider buying the car before the end of the year.  Then you can deduct the sales tax on the auto in addition to the sales tax amount calculated from the IRS tables.
  12. Consider getting a home equity loan in order to pay off personal loans where the interest is not deductible.  You can deduct the interest on up to $100,000 of the home equity loan, regardless of how you use the borrowed funds.  With interest rates at an all-time low, this is the best time you will ever find to refinance your home.
  13. For the same reason, consider selling stock investments with a large amount unrealized gain.  Be sure to check with your tax advisor so you can get advice about your particular situation.
  14. As long as it makes financial sense and fits with your financial goals, sell any of your stocks that are in a loss position to offset any capital gains you may have from the sale of other investments.  But if you have losses from 2014 or prior years, consider selling stocks that have built-in gains in order to use the loss and shelter the gain.  If you are replacing the sold stock, you must wait 30 days or consider buying a different company’s stock in the same industry.
  15. Consider investing in tax free municipal bonds.  These bonds are typically free from federal, state & local taxes.  This makes them an excellent tool to reduce taxable income even for higher income tax payers.
  16. If you have taxable income from investments that you will not use to live on for a number of years, consider investing in an annuity in order to defer the taxes on this income until you use it in the future.
  17. Pay student loan interest that may be owed but has not yet been paid before year-end.
  18. Be sure to review your Alternative Minimum Tax (AMT) liability exposure.  You may be able to reduce it or eliminate the damage by postponing tax preference items until 2016.  Check your 2014 tax return:  If you paid an AMT, get with your tax advisor and explore ways you may be able to avoid it.
  19. Keep good records to “audit proof” your deductions.  The IRS follows a simple rule—if it isn’t written down, it didn’t happen!  Be sure to keep good records for every deduction and receipt of non-taxable income.
  20. If you and your siblings pay for more than 50 percent of your parents’ support, you should explore claiming them as an exemption.  If you are single, this may allow you to claim the lower head-of-household status.
  21. Make the most of health savings accounts (HSAs) for paying health care costs that are not covered by insurance.  If your employer offers one, contribute as much as you can afford up to the maximum allowed.  You can contribute $3,350 if you are single and $6,650 for families.
  22. Beware of the new additional 0.9% Medicare tax.  Under ACA (ObamaCare), starting in 2013, taxpayers have had to pay this tax on wages and self-employment income that exceeds $200,000 per year for single filers, $250,000 for married and $125,000 for married filing separately.  If you are income fluctuates be sure to review timing strategies in order to avoid the tax.  Perhaps you can defer a bonus, or defer stock sales and property sales into a year where the tax will not apply.
  23. Rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. 

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but reading this article or watching this video doesn’t make you a client:  Before relying on any discussed here, contact a tax professional to discuss your particular situation.