11 Tips for Year-End Tax Planning

With the end of the year approaching, it’s time for strategic moves to lower your 2015 tax bill.

There are some smart tax moves to make before the end of the year.

Strategy: Prepay deductible expenditures

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2015 write-offs makes sense — if you expect to be in the same or lower tax bracket next year. See the table at the end of this column for the 2015 federal brackets. The bracket cutoffs for next year will be just a few dollars higher, thanks to small inflation adjustments.

January house payment

Accelerating the house payment that is due in January will give you 13 months’ worth of deductible interest in 2015 (unless you’ve already been following the prepayment drill). You can use the same strategy with a vacation home.

State and local taxes

Prepaying state and local income and property taxes that are due early next year can reduce your 2015 federal income tax bill because your total itemized deductions will be that much higher.

Medical expenses and miscellaneous deduction items

Consider prepaying expenses that are subject to deduction limits based on your adjusted gross income (AGI). AGI is the number at the bottom of page 1 of your Form 1040. It includes all taxable income items and a few write-offs such as the ones for alimony paid and moving expenses. The two prime AGI-sensitive candidates for the prepayment strategy are medical expenses and miscellaneous itemized deductions.

Medical expenses are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be 65 or older as of year-end, the deduction threshold is a more-manageable 7.5% of AGI.

Miscellaneous deductions — for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses — count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the 2%-of-AGI hurdle and getting some tax savings.

Warning: Prepaying is not a no-brainer

The prepayment strategy can backfire if you will owe the alternative minimum tax (AMT) for this year. That’s because write-offs for state and local taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions. So prepaying these expenses may do little or no tax-saving good for AMT victims. Solution: ask your tax adviser if you’re in the AMT mode before prepaying state and local taxes or miscellaneous deduction items.

Strategy: Accelerate charitable giving

Prepaying charitable donations that you would otherwise make next year can reduce your 2015 federal income tax bill because your total itemized deductions will be that much higher. Donations charged to credit cards before year-end will count as 2015 contributions.

Donate appreciated stock; sell losers and donate resulting cash

If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve held in a taxable brokerage firm account for over a year, consider donating them, instead of cash, to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and donate the cash sales proceeds. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Remember: You must itemize deductions to gain any tax-saving benefit from charitable donations, except for donations out of an IRA, as explained later.

Strategy: Prepay college tuition

If your 2015 AGI allows you to qualify for the American Opportunity Tax Credit for higher-education (worth up to $2,500 per qualifying student) or the Lifetime Learning Tax Credit for higher-education (worth up to $2,000 per tax return), consider prepaying college tuition bills that are due in early 2016 if that would result in a bigger credit on this year’s Form 1040. Specifically, you can claim a 2015 credit for prepaying tuition for academic periods that begin in January through March of next year.

The American Opportunity credit is phased out (reduced or completely eliminated) if your modified AGI (MAGI) is too high. The phaseout range for unmarried individuals is between MAGI of $80,000 and $90,000. The range for married joint filers is between $160,000 and $180,000. MAGI means “regular” AGI, from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have.

Like the American Opportunity credit, the Lifetime Learning credit is also phased out if your MAGI is too high. However, the Lifetime Learning credit phaseout ranges are much lower, which means they are much more likely to affect you. The 2015 phaseout range for unmarried individuals is between MAGI of $55,000 and $65,000; the phaseout range for married joint filers is between $110,000 and $130,000.

Stay tuned for news on “The Extenders”

“The Extenders” is not the name of a new TV show. The term refers to a list of popular tax breaks that our beloved Congress habitually allows to expire before ultimately extending them for another year or two. The following two important extenders expired at the end of 2014, but I expect Congress to resurrect them both for 2015. Be prepared to act fast around year-end if these breaks are extended, as expected.

Option to deduct state and local sales taxes instead of income taxes

If you will owe little or nothing for state and local income tax in 2015, you can choose to instead deduct state and local general sales taxes. This assumes that this option, which expired at the end of last year, is resurrected for 2015. I’m almost sure that will happen. If so, you can deduct predetermined sales tax amounts from IRS tables based on where you live (unless you’ve kept receipts that support a bigger number). In addition, you can deduct actual sales tax amounts for major purchases such as a motor vehicle (car, truck, sport-utility vehicle, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an airplane, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle. So making a major purchase or vehicle lease between now and year-end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

Don’t overlook estate planning

For 2015, the unified federal gift and estate tax exemption is a relatively generous $5.43 million, and the federal estate tax rate is a historically reasonable 40%. For 2016, the exemption goes up just a bit to $5.45 million. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. You may also have state death tax issues that need to be addressed. Finally, you may need to make some changes for reasons that have nothing to do with taxes (births, deaths, and so forth). Contact your estate planning pro if you think your plan might need a tune-up. Year-end is a good time to get it done.

Together we can estimate your likely tax position and come up with strategies that make sense for you with plenty of time to implement them. Call Williams and Kunkel, CPA, LLP CPAs  in Flower Mound at 972-446-1040 to get help with your year-end tax planning.

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Source: Market Watch