BY DEBRA L. SMITH, CPA
As the end of the year draws near, there is no
better time than the present to begin strategizing
about how to effectively minimize your taxable
income and maximize allowable deductions. The
following seven tips will help you identify ways to
keep more of your own money.
1. Save for retirement – maximizing your
401(k), 403(b) or traditional IRA contributions
serve a dual purpose – saves taxes now and provides
a nest egg for retirement. Contributions to
401(k) or 403(b) accounts can reduce your taxable
income by as much as $18,000 (with an additional
$6,000 catch-up allowed for those over 50).
Contributions to traditional IRA accounts are
tax deductible up to $5,500 for 2015 (with and
additional $1,000 allowed for those over 50). As
an additional note, contributions limits for these
plan types are set to remain at the 2015 limits
noted above for 2016 as well.
2. Donate to charity. Charities often request
support during the holiday season, so give. Contributions
to charities are tax deductible for those
individuals that itemize deductions. Cash and
non-cash contributions qualify, so you can donate
using cash or check or clean out your cupboards
and closets and donate goods and clothing to
charities like the Goodwill. Just be sure to get and
keep receipts for documentation of goods or cash
The final way to take advantage of the tax
benefits of generosity is to sell appreciated stocks
or other investments you have held for more than
one year. This offers a sort of double whammy tax
benefit. You get a charitable donation deduction
for the fair market value of the investment at the
date of donation and you avoid the capital gain tax
on the appreciation of the asset.
3. Make tax deductible payments early. Paying
January’s mortgage payment in December,
prepaying property taxes in December, or paying
estimated state taxes that are due Jan. 15 before
year end will move those deductions to the 2015
return. This is a good strategy if you expect to have
less income, be in a lower tax bracket in 2016 and
are not subject to alternative minimum tax.
4. Take advantage of capital losses. If you sold
investments during 2015 at a gain, think about
selling some others in a loss position to offset the
taxable income generated.
5. Consider maximizing the medical expense
deduction – qualifying medical expense are
deductible as itemized deductions if they exceed
10 percent of adjusted gross income (7.5 percent
for those 65 and over). If you have already paid a
substantial amount of medical bills in 2015 and are
near or over this threshold, consider scheduling
and paying for dentist or doctor appointments,
buying prescription medications before year end
or buying new glasses or contacts in order to
maximize this deduction.
6. Take advantage of education related breaks.
If you are paying college tuition for yourself or a
dependent, consider paying the spring semester
bill early to include it in 2015 deductions. If you
don’t have children of college age consider opening
or contributing to a Coverdell Savings Plan or
529 College Savings Plan for future college use.
Although these accounts do not qualify for Federal
deduction, they allow a contribution of $14,000 per
child per year and qualify for a partial deduction
or credit on the New York state tax return.
7. Pass on wealth tax free. If you have substantial
wealth that you would like to pass on to future
generations, consider using the annual gift tax exclusion
to maximize the tax benefits to you. Gifts of
up to $14,000 per year ($28,000 for couple married
filing jointly) per beneficiary can be made tax free.
The tax tips are just a few of the more general
ideas for maximizing deductions and minimizing
taxable income. These strategies are not appropriate
for every taxpayer and there are many other
strategies that can be employed depending on individual
situations. If you need more information
on these or other tax planning strategies contact
a tax professional.
Smith is a tax manager with Marvin and Company