Another tax year is drawing to a close. But there's still time for individual taxpayers to trim their tax liabilities for 2015 and beyond, before the New Year begins. Here are 10 eleventh-hour moves that you can still make before the clock strikes midnight on January 1.
1. Increase Your 401(k) Deferral
Consider increasing your 401(k) deferral for the last few paychecks of the year. Doing so can add to your retirement savings and lower your tax liability. Many taxpayers will have plenty of room to spare with an annual deferral limit of $18,000 in 2015 ($24,000 if you're age 50 or over). It's especially easy to do if you've exceeded the Social Security wage base of $118,500 in 2015 — if you just allocate the Social Security tax savings to your 401(k) account, you won't cut your take-home pay.
2. Assess Your AMT Situation
With the help of your tax adviser, you should have enough information in December to make a reasonable estimate of whether you'll be subject to alternative minimum tax (AMT) for 2015. Don't panic if it looks like you'll owe significant AMT in 2015 — there's still time to take steps to lower your income for AMT purposes. For instance, you may be able to postpone certain tax preference items (such as tax-exempt interest on certain private activity bonds). Also, consider deferring expenses that aren't deductible for the AMT (such as state and local taxes) to next year so you don't lose the benefit of the deduction.
3. Take Your RMD
Generally, you need to take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs every year once you hit age 70½. Contact your tax adviser immediately if you've waited this long to arrange an RMD for 2015. The penalty for failing to take an RMD equals 50% of the amount that should have been withdrawn — and that's on top of the regular tax. The amount of your RMD in 2015 is based on IRS life expectancy tables and account balances on December 31, 2014.
4. Visit Your Doctor or Dentist
Unreimbursed medical and dental expenses are deductible only to the extent that the annual total exceeds 10% of your adjusted gross income (AGI) or 7.5% of AGI if you're age 65 or older. If you're close to this threshold (or you've exceeded it), additional elective expenses — such as a dental work or eyeglasses — can boost your deduction. If your medical and dental expenses are too low to be deductible, you might as well wait until next year to visit a health care professional for services that aren't covered by insurance (unless it's an emergency situation).
5. Convert to a Roth IRA
Invest in your future by converting all (or part) of a traditional IRA to a Roth IRA this year. Unlike distributions from traditional IRAs, which are fully subject to tax, qualified distributions from a Roth IRA — generally, those made after age 59½ — are 100% tax-free after five years. But you must pay tax in the year of the conversion. Typically, it makes sense to convert IRA funds over several years to lessen the tax bite in a given year and avoid being pushed into a higher tax bracket. This strategy generally makes more sense if you're in a lower tax bracket today than you expect to be in when you receive retirement distributions. Although a Roth conversion will actually increase your taxes in 2015, it might save significant tax in future tax years.
6. Support a College Graduate
If your child graduated from college this year and is under age 24, you may claim a dependency exemption for him or her as long as you provided more than half of the child's support in 2015. However, it might be difficult to clear that threshold, especially if the child has landed a job that pays well. Barring other extenuating tax circumstances (for example, a potentially high "kiddie" tax), consider making this holiday season extra-special by giving a generous cash gift that will help support your child — and put you over the support threshold for the tax year.
7. Prepay Tuition for Next Semester
Parents of children enrolled in higher education programs may qualify for one or two higher education credits: the Lifetime Learning credit and the American Opportunity credit. If you pay next semester's tuition before January 1 — even for a semester beginning as late as March 2016 — some or all of the expense may reduce your tax liability dollar-for-dollar for 2015. Unfortunately, these credits are gradually phased out for higher-income parents. Other rules and limits apply, so be sure to contact your tax adviser before implementing this strategy.
8. Prepay Expenses on Real Property
Assuming you don't owe an AMT liability and don't expect to be in a higher tax bracket next year, it generally makes sense to accelerate deductible expenses into the current year to reduce your 2015 tax bill. Then you can worry about your 2016 tax bill next year end.
Among the largest itemized deductions for most taxpayers are mortgage interest and property taxes on their personal residences and vacation homes. Homeowners can lower their 2015 taxes by prepaying mortgages and state and local property taxes in December 2015 that are due in early 2016.
9. Sell Securities
Keep taxes in mind as you plan year-end stock transactions. Net long-term gain is taxed at a maximum rate of 20% for those in the top income tax bracket. If you expect to have a net capital gain, losses resulting from the sales of securities can offset the gain plus up to $3,000 of ordinary income. Alternatively, if you have a net loss, any capital gains from sales are tax-free up to the amount of the loss. If you want to claim a transaction for the 2015 tax year, the trade date must be on or before December 31.
10. Charge Your Donations
If you itemize expenses on your personal tax return, you can deduct charitable contributions made to a qualified organization in 2015 as long as they're charged before midnight on January 1 — even if you don't pay your credit card bill until 2016. Mailed checks must be postmarked on or before December 31 to be deducted on your 2015 tax return.