Everyday busy-ness and plunging into the holidays takes attention away from tasks that could save us money when it’s time to pay income tax. The following list of tax strategies isn’t new, but taking advantage of a few things will be worth it when it’s time to pay tax (or not!):
1. Review Income and Expenses
If possible, defer income from self-employment, consulting or bonuses into 2016. Deferring a sale that creates a capital gain is another way to reduce taxes that will be due for 2015. At the same time, see if you have any deductible expenses that you can pay and claim in 2015 such as property tax or interest payments.
2. Understand Which Losses Offset Income
If you want to take a loss, remember that capital losses can’t be used against other types of income. For securities, buying the same security within 30 days before or after you sell it negates the loss.
3. Plan Itemized Deductions
To be deductible, medical expenses must exceed 10% of adjusted gross income (AGI), or 7.5% of AGI for those age 65+. If you’re close to the number, scheduling a non-urgent procedure makes sense for 2015.
Miscellaneous expenses must be 2% AGI or more to qualify for deductions. Consider accelerating payments for legal fees, tax preparation, or claiming unreimbursed business expenses.
For charitable contribution deductions, ask for documentation for all cash donations. Charities should automatically provide written acknowledgement for donations of $250 or more. Donations to foreign organizations, political groups, social clubs, and/or individuals are not tax deductible.
4. Increase Withholding as Needed
If it looks like you haven’t paid in enough income tax, increase withholding that will appear on a Form W-2. You want to avoid an underpayment penalty.
5. Beware of State Residency Rules
If you moved to Texas in 2015, you may be counting on not paying state income tax. However, the general rule is if you reside in a state for 183 or more days during the year, then that state may claim the ability to tax all of your income. You also need to make sure that you have ‘officially’ cut ties with your former state. Secure your driver’s license and bank accounts in the state where you want to establish proof of residency.
6. Get Involved
Investors in companies may be subject to a 3.8 percent Medicare tax on passive business income. If it makes sense for the business, active, working participation that you have in the company may reduce or eliminate status as a passive investor. You must document work at the time of the activity, and not wait until time for tax prep. Examples of documentation include appointment calendars, emails, or any documents that you draft on behalf of the business.
Other opportunities, but out of your hands
Tax extender provisions do not usually pass until the last minute. But, just in case they do pass, here are a few tax benefits you may be able to capture:
- Taxpayers aged 70½ and over may make tax-free charitable contributions from individual retirement accounts (IRAs)
- Businesses may deduct up to half of eligible equipment placed in service this year
- Teachers may receive an above-the-line deduction for $250 in classroom expenses
- Students and parents may receive an above-the-line deduction for tuition expenses
- Companies may receive a credit for qualified research expenses
- Taxpayers in states without an income tax may be able to deduct state sales taxes
If you have questions about your 2015 tax liability, please contact a Salmon Sims Thomas tax advisor.