It’s probably the last thing you want to be doing as we head into the last quarter of the year. However, if you spend some time now reviewing the year and how you might take advantage of some opportunities that are available now, you could be very happy come the time to file your taxes during the first quarter of the 2016. USA Today provided a great overview of items to consider at the end of 2014. Many of those same opportunities are still viable as we move into the end of 2015. The article provides year-end tax strategies to use before December 31st.
If you are self-employed:
Consider deferring income. If you are self-employed and have had a particularly good year, it may make sense to defer some of that income until 2016 to reduce 2015's tax burden. If you're self-employed, simply wait until late December to issue invoices instead of early in the month — ensuring you won't receive payment (or have to pay taxes on that income) until next year. Similarly, if you're getting a big year-end bonus, you may be able to ask your boss to delay that until after January and thus not take the tax hit on your income until 2016.
Pay your taxes now.
Believe it or not, you get a deduction on your taxes just for the act of paying your taxes. This can include property taxes as well as estimated state taxes that can be deducted on a federal tax return. If you prepay your estimated taxes before April, you can deduct that tax payment in some situations.
Donate to charity.
Any charitable giving must be done by the end of the year to be claimed on your tax returns. That means planning ahead if you're donating a beat-up car to your favorite local charity, to ensure it's done before New Year's Day. Thankfully the digital nature of giving in 2015 allows even the worst procrastinators to claim any donations made by credit card as late as 11:59 p.m. on Dec. 31. As long as your receipt shows processing before the ball drops on New Year's Eve, you can claim the donation in tax year 2015.
Give gifts up to $14,000.
Well-off Americans planning for their estate can make good use of gifts to heirs of up to $14,000 each calendar year. Rather than shoulder a big tax burden upon death, some Americans choose to slowly transfer their wealth to relatives by a yearly tax-free gift. If this appeals to you and you have room before hitting that $14,000 threshold, December is the perfect time to make that maximum tax-free gift around the holidays. Also, if you want to accelerate the wealth transfer, after Jan. 1 you are in a new tax year — and have the ability to give another $14,000 per person and then claim that separately on your 2016 returns.
Sell a money-losing investment to offset your gains.
Referred to as "loss harvesting," selling a bad investment to offset profits from a good investment can make a lot of sense. The IRS calculates capital gains on a net basis year to year, so if you have one investment that made $10,000, you can avoid paying a penny in taxes on that profit if you have $10,000 in losses elsewhere to zero it out. Considering capital gains taxes can be as high as 39.6% for top earners, selling underperformers can be a powerful way to keep more of your profits from good investments.
Max out your 401(k).
The maximum 401(k) contribution for calendar year 2015 is $17,500, and every penny you put into this retirement account reduces your total taxable income on the year. The only hang-up is that since this money must be taken out directly by your employer, the only way to catch up is to significantly increase payroll deductions from now through year's end. That might mean putting almost all of your paycheck into your 401(k) and living very frugally for a few weeks … but if you can afford it, the tax benefits could be substantial.
Take all of your RMDs (Required Minimum Distributions)
If you are age 70½ or older, the government requires you to start drawing down your tax-sheltered retirement plans like an IRA via "required minimum distributions" each year. The reasoning is that you deferred taxes on these funds for years and the Internal Revenue Service can't get its share until you actually take the money out — so the tax man demands you withdraw a set amount each calendar year. If you don't withdraw this minimum amount, you may take a hefty penalty of as much as 50% on the sum you should have withdrawn.
Since Uncle Sam is going to get paid either way, make sure you ask your tax professional or consult the IRS website for more details on your specific RMD figure to prevent leaving money on the table. Required minimum distributions vary based on age and how much you have saved.