Am I Too Late To Tax Plan? Almost!
If you’re like most people, the last time you even thought about your income taxes was April 15th and even though you thought it might be a good idea to make some good tax wise decisions this year, you were too busy to even notice the entire year is almost over. Once December 31st passes there is virtually nothing you can do to improve your tax situation.
So now that we are in the final few weeks of the year, what choices should you make to end up with the best tax situation come filing time? Here are some of the top tips for end-of-the-year tax decisions.
1. Get Married: When you get married, even if you marry on the final day of the year, you get the benefits for the entire year. Couples comprised of one high income individual and one low to no income individual receive the largest benefit from the married filing status. For 2016 individuals may claim the standard deduction of $6,300 and married couples $12,600.
As an example assume John earns $100,000 per year and Mary is a homemaker who doesn’t earn income. If John and Mary file as single, John can deduct $6,300 from his taxable income and Mary’s deduction will be wasted because she is not required to file. However, if John and Mary get married by December 31st, John can deduct $12,600 from his income and pay less in taxes.
2. Don’t Get Married: Ok, this is why every time you ask a tax preparer a generalized question, they always give that annoying “It depends” answer. In many situations, especially when children from previous relationships are involved, getting married will actually cost you significant money due to a loss of tax credits.
Example: Eric earns $25,000 a year and Sarah earns $35,000 a year. Eric and Sarah have one child together and Eric has sole custody of a child from his previous marriage. Currently Eric and Sarah file as single. Eric can claim his child from a previous marriage and Sarah can claim the child they have together because she earns more than Eric.
Each receives a substantial refund due to the EITC and Additional Child Tax Credit of around $3,000 each. If the couple married, that $6,000 in refunds could be reduced to about $1,000. If you fall into this category wait until January 1st to get married.
3. Stocks(Sell/ Don’t Sell): If you have stocks that have lost money up until 2016, sell them before the year ends and you may deduct up to $3,000 of the losses from your income this year(any additional loss may be carried over to next year). If these are stocks you still expect to do well, you may repurchases them after 30 days, otherwise your forfeit some of the loss deduction.
On the flip side of stocks, if you have stocks that have done well through the year and are itching to sell, try to hold off until January 1. This will prevent the additional taxable capital gains from increasing your income in 2016. Stock gains and losses only become gains and losses when you sell.
If the only stocks you have are in retirement accounts like IRA's or 401(k)'s, selling now won't make a difference on your 2016 taxes.
4. Pay Bills Early: People who ordinarily itemize their deductions, can consider paying off deductible expenses early. Common deductible bills may include medical bills, mortgage interest and property tax bills. If you have deductible bills due early in 2017, consider paying them before the end of 2016 and take advantage of the tax breaks a year earlier. If you were planning a significant medical procedure early in 2017, consider having it scheduled before the end of 2016.
5. Defer Pay: If you are expecting a nice year-end bonus(lucky you), ask your boss to consider holding off until January. By deferring that income, you’ll reduce your taxes for 2016.
6. Give To Charity: Now that you’ve realized it’s time to make a run to Goodwill or other local charity to donate all those items you just don’t have room for anymore, be sure to get over there before the end of the year and make sure you get a receipt. If you plan to donate cash, you will need to have written proof of the donation in order to deduct it.
7. Go Green: You can receive deductions for various energy efficient improvements you make to your home. So if you’re planning to do so, see if you can pay for them before the end of the year. Also be sure to check with a tax expert about what improvements are deductible (don’t rely on the salesman’s advice on this one).
8. Start A Business: If you’re worried about paying too much in taxes for 2013, consider starting a business before the end of the year. As a sole proprietor there is literally no paperwork to do. Simply decide you’re going to make money by offering a good or service and you are in business.
Once you are in business, expenses such as office supplies, tools, materials, advertising and any other expense deemed ordinary and necessary in your trade can all be deducted from your income. Since you won't likely make much income in 2016 since you started you business with less than 60 days left in the year, you will have a business loss and reduce your taxable income.
If you already operate a business, consider not billing December customers until January and buying January supplies in December. Both of these actions will reduce your 2016 taxable income.
Visit Your Tax Specialist: The surest way to put yourself in the best possible tax situation come filing time is to set a tax planning appointment with your favorite tax specialist and discuss a plan while you still have time to take action. With less than 60 days left, there’s no reason to wait any longer. Click here to make an appointment!