The year is almost over, but there's still time to cut down your tax bill and set yourself up for a strong 2016.
It’s a strange but necessary oddity of the tax cycle that the 2015 bill isn’t due until April 2016. But there are some things you can do before Dec. 31 to positively impact your tax burden for 2015.
But let’s start with when you do your taxes. If, like many, you use your tax withholdings as a sort of mini-savings plan, putting aside too much throughout the year so that you’ll get a refund, you’ll want to file your taxes as soon as possible to regain control of those funds you’ve been loaning, interest-free, to the Federal and State governments. As I’ve mentioned several times before, overpayment throughout the year is a bad financial idea that gives the government interest you should be earning for yourself. While that interest probably isn’t going to make a huge difference to your bottom line in any one year, over time, everything adds up.
That aside, here are some steps to take now.
Optimize Your Deductions
Some work now can help you make sure you get the most from your tax deductions. Around the holidays, many are thinking of making charitable donations. While lowering your tax responsibility is rarely the primary impetus for such donations, you can positively impact your tax responsibility if you make your donation by Dec. 31. If there’s no more room under the stairs to hide Santa’s upcoming delivery goods, clean out your closets and make donations of clothes, furniture, old appliances, and anything else you no longer need or want to share with others. Make sure your donations are to a qualified organization, as defined by the IRS.
Make sure you get receipts for non-cash donations. While relatively charitable contributions aren’t typically at the top of the list of items in your filed return that can trigger an audit, exaggerating or inventing donations is both immoral and a very bad idea. And any large donations are at the top of the IRS’ list for triggering an audit.
Not Just Cash
You can also donate investments, such as shares of a stock, and take a deduction based on the full market value at the time of the gift. There are some restrictions on doing this, and the transaction can be a little more complicated than simply donating items or cash. If you work with an advisor, talk to them about the best way to make this kind of donation and what it will mean for your tax liability.
You know that the interest you pay on your mortgage is tax deductible, but what you might not know is that if you’re in position to do so, you can pay 2016’s January mortgage bill and deduct that interest in 2015, as long as the payment is made by Dec. 31. The same is true for property tax payments, which you can make in advance as well.
When it comes to your taxes, like anything else, advance preparation can pay dividends.
This article is for informational purposes only and should not be considered tax advice.