Last Minute Tax Deductions
During the winter season, the April tax deadline can seem a long way off. Keep in mind you'll be reporting the previous tax year, which ends while you're sipping Champagne and humming "Auld Lang Syne." Addressing a few issues before you ring in the New Year can save you substantially at tax time.
Top Up Your 401(k)
Individual Retirement Accounts (IRAs) are a procrastinator's dream, since you can contribute for the previous tax year right up until the tax-filing deadline. For the self-employed, the same holds true for Keogh plans, as long as the plan itself is registered by December 31.
Those with 401(k) plans to which an employer matches contributions may need to act before January 1, as the employee contribution deadline is December 31 of the tax year.
Contributions to retirement accounts are deducted from your taxable income, which can reduce the amount of taxes you owe or increase your refund. As with any interest-earning investment, the sooner you contribute, the more time compounding interest has to work its magic. Using personal finance software helps you estimate the impact retirement savings may have on your taxes.
The Season to Give to Charity
If you're giving to a qualified charity during the holiday season, your goodwill may impact your taxes for the year in which you made the donation. To claim donations to individual charities, you'll need to itemize deductions, rather than claim the standard deduction; an amount set each year by the IRS.
Receipts are required for all donations to IRS-qualified charities, and for donations larger than $250, acknowledgment of the gift by the charity is required. Often, one document serves both purposes. But contributions aren't limited to cash. In some cases you can deduct amounts for donated property such as household items, cars, boats and airplanes, though some items may be subject to special rules.
Deferring Income to the Next Tax Year
Your pay is taxed as you receive it in that tax year. Not all taxpayers have flexibility about when they receive earnings, but there are some situations where taking action before December 31 can lower your tax obligation for the year.
If you've earned a bonus, your income for the current tax year can be reduced if your employer allows you to receive it in January of the following year. Freelancers and self-employed persons can submit invoices at the end of December to ensure income is received in the following tax year. Deferring income adds to next year's total, so it works best when you have a strategy to offset the additional income next year, such as through an increased IRA contribution.
Watch Out for Expiring Tax Breaks
Each year, Congress decides whether to renew tax laws that are due to expire. For example, in 2014, over 50 laws expired, such as certain state and local sales tax deductions and "green" home remodeling credits.
While expired laws are sometimes extended, renewed or even applied retroactively, these changes may come late in the tax year or even after. This gives you little time to act to take advantage of extended laws, so check financial news sources and the IRS website for the latest reports on tax break renewals.
- TurboTax: Top 8 Year-End Tax Tips
- IRS.gov: Six IRS Tips for Year-End Gifts to Charity
- Forbes: Will Your Favorite Tax Break Be Restored for 2015?
- New Direction IRA: Individual 401(K) Contributions -- 2015 and 2016 401(K) Contribution Limits and Deadlines
- TaxSlayer: Charitable Contribution Carryover
- Quicken: About Using the Tax Planner to Estimate Taxes in Quicken Deluxe, Premier, or Home and Business
- Forbes: IRS Announces 2015 Tax Brackets, Standard Deduction Amounts and More