How to Save Income Tax - Know Why December 31 is the Key Date

Forget April 15. If you want to know how to save income tax, you need to understand that the important tax deadline is December 31, not April 15.

So many tax advantages get lost because taxpayers (you?) often overlook a simple fact: there is almost nothing you can do to reduce taxes for the prior year on April 15. Almost everything you can do to reduce your tax bill must be completed by December 31!

So you have 6 weeks to see your financial advisor and accountant to save income tax for 2015.

Why see your financial advisor first? Because your financial advisor looks forward and typically has ideas that can cut your tax bill now and in the future. Accountants typically look back and typically do not recommend innovative tax reduction tactics.

Here's how to save income tax for 2015:

How to Save Capital Gains Tax

If you have a loss on any stocks or funds, SELL THEM in order to get at least a deduction of $3,000 for capital losses. IRS gives this tax deduction to you every year and I will bet that most years you have not used it.  Talk about throwing money down the drain!  If you have capital gains to report, then it is best to sell as many capital loss items as you need to offset your capital gains. In other words, if you have $50,000 of capital gains to report from a transaction you did in March, then sell assets that will generate a $50,000 capital loss (your accountant can get into the specific of matching short term and long term items).

Perhaps you want to save income tax but you don’t want to sell and you may want to hold securities long term that have a capital loss.  No problem.  You can sell, get the tax savings in 2015, buy the securities back in 31 days and keep them as long as you wish thereafter.  But at least take advantage of the gifts that IRS gives to justify your complaining about taxes.

By the way -- you may have whopping capital gains to report if you own growth mutual funds. Because your fund does not typically announce or distribute capital gains until mid-December, you may want to call your funds and get an estimate the 2015 capital gain distribution so you can identify your capital losses as explained above.

 How to Save Income Tax Using Gifts Creatively

Sorry, but gifts to grandson Johnny are not tax deductible. Gifts to charities however are deductible, if you make the gifts before December 31. Charities always like cash but they also like stock.

If you have stock that has appreciated (and has been held more than 12 months), that is the best gift to give because

• You will avoid the capital gain tax on that stock
• You will be able to deduct the value of the shares

How to Save Income Tax by Bunching Medical Deductions

Until January 1, 2017, people age 65+ get a more liberal tax deduction for medical expense than others. So if you are 65+ and have some elective medical procedure to schedule, it will be best to get it done before December 31, 2016.  OR, if you will turn 65 in 2016, wait until then to incur the medical costs. Note that few people take the medical deduction as most if not all costs are covered by health insurance. But it is an item to mention to your accountant. You can find here a very liberal list of items you may be surprised qualify for the deduction.

If you are ready to buy long term care insurance, make your first payment this year as it qualifies as a medical cost. The more medical costs you can bunch into the same year, the better the probability and size of the tax deduction.

How to Save Income Tax Using Withdrawals or Conversion of IRAs and 401ks

Most people know one rule about taking money out of retirement plans: you can start taking money at age 59 ½ without penalty and must start taking withdrawals by age 70 ½. That well-known rule has some exceptions which may be lucrative for you.

How to save income tax by paying a little more this year

To save income tax, it could make sense to withdraw funds from these retirement accounts now if your tax bracket in 2015 is less than 25% (and you are over 59 ½). For 2015, a married couple with gross income up to $95,500 is in the 15% tax bracket.  If you have “unused capacity” in your 15% tax bracket, withdraw funds from your retirement plans and use up that low-bracket capacity.  Isn’t it better to pay tax today at 15% rather than a higher rate later (the author’s math tells him the federal tax rate will rise)? Note that beneficiaries of decedent retirement plans don’t need to be 59 ½ to make penalty-free withdrawals.

The same concept applies to Roth conversions.  If you are in a lower tax bracket in 2015 (15% or less), use your capacity in the 15% federal bracket and convert as much of your IRAs and 401ks to Roth accounts. You will pay the tax today at a low rate and then have an account that continues to grow tax free, possibly for decades.

Caveat: I have simplified everything in this article. Had I included every tax detail and specific, your brain would freeze, your eyes would gloss over and you could have tax-induced seizure. So do not rely on this article for tax or investing advice but rather meet with your financial advisor and accountant as soon as possible before December 31.

You Pay More Taxes Than Necessary

And we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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