By Sheryl Rowling
SAN DIEGO — We have two weeks before the end of the year. Is there anything you can do now to lower your 2015 tax bill? The answer is YES! Here are five tips:
- Make charitable contributions. There are several ways to give: donating household items or cars, giving money or transferring appreciated securities.
- If you are donating physical items, they need to be in good condition. You can deduct the lower of what you paid for the items or the current value. If your noncash gifts are in excess of $500, you will need to provide details on what you gave, what you paid, the value and the name and address of the charity. If you give something worth over $5,000, you will need an appraisal. Be sure to get a receipt dated no later than December 31st!
- If you are giving money, you can give by means of cash, check or credit card. If you are giving cash, you must have a receipt. If you are giving by check or credit card, you need a receipt for donations in excess of $250. If you mail a check, it must be postmarked by December 31st to be deductible in 2015. If you give by a credit card, you must charge it by December 31st – even if you pay the bill in 2016.
- Instead of donating cash, you can transfer appreciated shares from your investments directly to the charity (or charities). You can deduct the full value of the transferred shares and you won’t pay tax on the appreciation. It’s a double benefit! If you tend to make many smaller donations or need the deduction this year but don’t want to give it all right away, consider a donor advised fund (like the Jewish Community Foundation). You will be able to get the deduction now and you can make individual grants from your fund over time.
- Harvest losses from your investments. With the recent market volatility, you might have investments that have lost money. By selling these positions, you can recognize a capital loss on your tax return. Be sure not to buy back within 30 days or the loss won’t be deductible. Instead, consider replacing what you sold with something else that’s similar but not “substantially identical.” For example, if you sell shares of an S&P 500 index fund, buy replacement shares of a Russell 1000 fund. The tax losses you generate can be used to offset gains this year and future years until used up. You can also write off up to $3,000 of losses each year against your other income.
- Figure out if you are subject to Alternative Minimum Tax (AMT). AMT is not a pleasant tax. You calculate your tax the regular way, then you calculate AMT. You pay whichever is greater – not a great alternative if you ask me! AMT is kind of hard to predict, but you could trigger it by having large capital gains or a high proportion of itemized deductions vs. income. When you are hit with AMT, many of your deductions are not utilized. These include home equity interest, miscellaneous itemized deductions, state income taxes and property taxes. Thus, if you are subject to AMT, you will want to put off paying deductible expenses until next year.
- Accelerate deductions if you are not subject to Alternative Minimum Tax and if you expect your 2016 tax bracket to be the same or higher than 2015, consider prepaying deductible expenses by December 31st. You will get the deduction right away and will offset higher bracket taxes. The easiest two options are prepaying your next property tax payment or your state income taxes.
- Look at converting Traditional IRAs to Roth. If you are in a zero percent or low tax bracket, consider converting some of your IRA holdings to a Roth IRA. This is a rare opportunity to pay your taxes at a discount. Here’s how it works: Your Traditional IRA will be subject to ordinary income tax whenever you take money out (or your kids inherit it). When you convert to Roth, the conversion amount is subject to tax right away, but then there is never any tax again – on principal or earnings! When you can convert amounts at little to no tax, it’s a freebee. You can avoid all future tax!
I hope this helps! Even jumping on one of these tips can potentially save you thousands of dollars. Just be sure to make your moves before the New Year!
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com