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Reduce Your Bill Now for 2015 Taxes

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Although it’s only the holiday season, and taxes might be the furthest thing from you mind, changes in your financial situation before the year ends can affect how much you’ll pay in taxes next year. Consider these strategies that could reduce your tax bill.

Give to Charity

Besides helping a worthy cause, giving to charity provides tax benefits in several ways. It provides a deductible (if you are itemizing your deductions rather than taking the standard deduction) and lowers your taxable income. Donations charged to credit cards before year-end count as 2015 contributions. Check with your tax adviser first to determine the maximum amount you can deduct based on your income.

Start Getting Organized

In addition to preparing for 2015 taxes by making financial moves now, you can get ready for the least fun season of the year by starting to organize. You should store all your tax forms in one place, such as a folder or filing cabinet. Make sure you have the forms you need:

Employment. If you are employed, your employer should send you a W-2 form by the end of January, showing how much you earned, how much was taxable and how much was withheld. If you're an independent contractor, the company you worked for should send you a 1099-MISC form showing your gross earnings. For those who are self-employed, you’ll need to gather all your receipts for business-related expenses, including the mileage records for your car, equipment and supplies, and/or utility bills.

Your W-2 form will also show any state and local income taxes you paid, which are deductible.

Savings accounts. You should receive statements and official tax forms from each savings account. Interest earnings are typically documented on Form 1099-INT.

Stocks. You should get a Form 1099-DIV for each stock, mutual fund or money market account. If you use a broker, they will send you a Form 1099-B, which reports on the proceeds.

Mortgage. Lenders will send Form 1098 to homeowners. If you have a vacation home, interest on that loan will show on a separate Form 1098 and is deductible.

Real estate taxes. If you pay your taxes through an escrow account from your mortgage company, the amount will be shown on a 1098 form.

Charity. When you donate cash to a qualified charity, make sure you get a receipt. If donating goods, such as to a local thrift store, also ask for a receipt. You can even get a tax break for volunteering by deducting 14 cents for each mile you drove for volunteer purposes. To document, keep a log of each time you worked and the round-trip distance.

To get an extra bonus, instead of donating cash, you can donate stock or property that has appreciated in value. If you’ve owned the asset for more than one year and one day, you can deduct the property’s market value on the date of the gift and avoid paying capital gains tax on the stock or property’s appreciation if you sold it.

For older adults, donations to IRS-approved charities help fulfill the rules that require you to withdraw a certain amount from your traditional IRA starting at age 70½. If you fail to take the required minimum distribution, you could end up paying a 50 percent tax penalty. Last year, the maximum you could donate was up to $100,000, and it’s unclear whether Congress will maintain that maximum this year.

Sell Loser Securities

To offset any capital gains that you’ve made this year, you can get rid of bonds, CDs or stocks that are worth less than what you paid for them. This is especially helpful if you’ve profited from short-term gains, which have a higher federal tax rate than long-term gains. If your capital losses exceed your capital gains, you’ll have a net capital loss for 2015 and thus lower taxes.

Be aware that the amount of investment losses that you can write off is limited to $3,000 per year. Any excess net capital loss is carried over to 2016 and beyond until you use it up. Before taking any action, you should talk with your tax and financial adviser to determine whether selling the losses makes sense for your situation.

Contribute to an IRA

By putting money in an IRA or employer-sponsored retirement plan such as a 401(k), you can reduce your taxable income. Traditional IRAs are tax deductible for both state and federal taxes for the year you make the contribution. However, withdrawals in retirement are taxed at ordinary income tax rates. As an alternative IRA, the Roth retirement plan taxes you when you contribute but not when you withdraw or earn money on it. In addition, qualified Roth distributions are free from federal income tax, making them attractive investment vehicles, and are not subject to RMDs (required minimum distributions). However, you must hold a qualified Roth IRA for a minimum of five years before you can make penalty-free distributions. Be aware that if your income exceeds certain levels, the maximum amount you can contribute to a Roth IRA may be lower.

With traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take the money out in retirement. The decision is whether you want to pay taxes now or later, and that depends on if you think your tax rate is likely to be lower now than when you retire (either because you will be making more money or because you expect taxes to increase).

Adults older than 50 can contribute more than their younger counterparts: For 2015, you can contribute up to a combined $6,500 for both a traditional and Roth IRA. The deadline for both type of IRA contributions is April 15 of the year you pay your 2015 federal income taxes.

Deduct Medical Expenses

Most older adults don’t itemize their deductions, because they may have little or no mortgage interest to pay, but at the same time they often have larger medical bills. Although medical expenses can only be deducted to the extent they exceed 7.5 percent of adjusted gross income (AGI) for those over 65 for 2015 (10 percent for everyone else), once you add your Medicare insurance premiums to the total amount of out-of-pocket costs, you can easily reach the 7.5 percent-of-AGI threshold and exceed the standard deduction amount.

To figure out if you have enough medical expenses to benefit from itemizing, add up the following (from NISVOCCICA LLP).

  • Premiums for Medicare coverage. Seniors enrolled in Medicare can count premiums for Medicare Part B (for medical costs other than hospital bills), Part C (for Medicare Advantage policies) and Part D (for prescription drugs) as medical expenses.

  • Premiums for supplemental Medicare coverage (Medigap insurance).

  • Premiums for qualified long-term care coverage. These are subject to age-based limits.

  • Out-of-pocket medical expenses. Add out-of-pocket costs from insurance co-payments and deductibles and for dental and vision care.

  • Medical expenses paid for relatives. Did you pay health premiums or uninsured medical expenses for a qualifying relative this year? If you did, count these outlays too.


“7 ways to get organized for the tax year,” Bank Rate

“Seniors: Don't Overlook Medical Write-offs,” February 2015, NISVOCCICA LLP

“Top 8 Year-End Tax Tips,” TurboTax

“Smart year-end tax planning moves,” Nov. 10, 2015, Market Watch

“How to cut your 2015 tax bill,” Nov. 4, 2015, Market Watch

“7 Smart Year-End Tax Moves To Prepare For 2015,” Dec. 1, 2014, Forbes

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