Some Savvy Tax Moves to Make Before December 31
With the holidays kicking into full gear, the last thing you probably want to think about right now is taxes. But spending some time between now and the end of December, planning a few year-end tax strategies could pay big dividends come next April when it’s time to file your tax return for 2015.
Time is of the essence, says Spencer Wilson, EA. “December 31 is a hard and fast deadline for many year-end tax planning strategies. So there’s no time to lose if you want to make some moves that could save you big money on your tax bill next spring.”
Defer Income, Accelerate Expenses
Sonu Shukla, CPA breaks year-end tax planning strategies down into two broad categories: strategies for individuals and strategies for business owners. But there’s one strategy that generally applies to both individuals and cash-based businesses: deferring income and accelerating deductible expenses.
“This strategy could enable you to lower the amount of tax that you owe for tax year 2015,” he says. “This is accomplished by reducing your taxable income while increasing your deductions for this year.”
On the individual side, if you anticipate receiving any kind of compensation at the end of this year — like a year-end bonus, for example — ask if the payment can be held until early January. To accelerate deductions into 2015, you could make charitable contributions or additional retirement plan contributions before December 31, or even pay deductible property taxes before the end of the year.
Another year-end move for individuals is a strategy referred to as tax-loss harvesting. Michael Kilmer, CPA, explains how this works: “If you have any stocks or mutual funds that are underperforming and you don’t anticipate a turnaround, sell them before December 31 in order to realize the loss this year. Then the loss can be used to offset taxable gains you’ve realized on other investments in 2015.”
Tim Murphy, CPA points out that reducing capital gains is even more important now for high-income individuals who are subject to the net investment income tax (NIIT), one of those stealth taxes that’s part of Obamacare. “If you make more than $200,000 in modified adjusted gross income (or MAGI) in 2015, or more than $250,000 if you’re married and file your tax return jointly, the income from your capital gains will be subject to an additional surtax of 3.8 percent,” he says.
On the Business Side
The best way for cash-basis businesses to defer income is to wait until the end of December to send out invoices instead of sending them out early in the month. “This way, you won’t be in receipt of the income until January,” says Adams, Jenkins & Cheatham. “Therefore, you won’t have to pay taxes on it until you file your 2016 return in 2017.”
To accelerate business deductions, meanwhile, you could pre-pay business expenses that will be incurred early next year before December 31 or buy new equipment for your business. Section 179 allows you to expense and deduct up to $25,000 worth of equipment purchased and placed in service this year. “This amount could be increased retroactively if Congress passes a tax extenders bill this year, so this is worth keeping an eye on between now and December 31,” says Tera Kovanes, CPA.
It’s worth pointing out that deferring income and accelerating expenses doesn’t decrease the total amount of tax you must eventually pay. Rather, it delays the payment of tax for one year, thus allowing your business to hold onto cash for an extra year. “It’s essentially maximizing the time value of money for your company, which also helps boost your cash flow,” added Tom Gargiulo from Nation Income Tax, Accounting and Financial.
Finally, keep in mind that in some instances, the opposite approach might be better for your company: accelerating income and deferring deductible expenses. “This may be the case if your company’s marginal tax rate will be higher in 2016 than it is now,” says Bill Westbrook, CPA. “Doing so will increase your 2015 tax bill, but it could result in an overall lower tax liability over the two years combined.”