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Pretty soon tax season will be upon us, and there's more to do than go shopping for "Happy Tax-Filing" cards for your loved ones. There are lots of actions you can take now to shrink your tax bill in 2015. Keep reading for a bunch of ways to lower your taxes.
1. Beef up your retirement savings
Fund a retirement account or two, or increase your contributions to them, and you can greatly improve your financial future while lowering your taxes, too. With traditional IRAs and 401(k)s, for example, contributions reduce your taxable income for the year, thereby shrinking your tax bill. Roth IRAs and Roth 401(k)s, meanwhile, accept post-tax contributions, so they won't shrink your tax bill in 2015 -- but if you follow the rules, your contributions can grow significantly over time and be withdrawn in retirement tax-free.
2. Take advantage of a health savings account if you can
Those with high-deductible health insurance plans are able to contribute money to a health savings account, which offers many tax benefits. The money you contribute is deducted from your taxable income, lowering your tax bill. Contributions can be spent on qualifying medical expenses tax-free, and unused amounts can be rolled over from year to year. The contribution limit in 2014 is $3,300 for individual coverage and $6,550 for those with family coverage.
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3. Time your mutual fund investments wisely
If you're planning to invest in a mutual fund close to the end of the year, beware. Funds typically distribute dividends in December, and their shares fall in value by the amount of the distribution. That's fair for longtime shareholders, but if you buy before the distribution, you'll be hit with a tax bill. Ask the fund company when the distribution is and then buy after it; you'll avoid the tax and get a lower price to boot.
4. Offset investment gains with losses
If you've sold a bunch of stock and have some sizable gains, you can expect to fork over significant capital-gains taxes to Uncle Sam. But if you're also sitting on some paper losses, you might sell some of those losing stocks to generate an official loss that can be used to offset your gains. Have you gained $5,000 and lost $4,000? Your taxable gain is just $1,000. Did you gain $5,000 and lose $15,000? Your gain is now zero, you can use $3,000 of your loss to offset your income, and you can carry over $7,000 of losses to use next year. You might even buy back the losing stocks if you still believe in their futures -- just wait at least 31 days in order to avoid a "wash sale."
5. Close out positions in worthless stock
If you have some stock that's worthless now, perhaps because the company went out of business, you might ask your brokerage to buy it from you for a few pennies. That can officially close out your position and give you a usable loss with which to offset gains.
6. Be smart with gambling winnings and losses
Don't assume that Uncle Sam doesn't care about what goes on in Vegas and other gambling venues. You need to report winnings as taxable income, but you can deduct losses from them, too. So if you won $3,000 and lost $2,500, only $500 will be taxable income. If you won $3,000 and lost $30,000, though, you can wipe out the entire gain -- but not more. There's no offsetting of other taxable income, and no carrying forward losses.
Take advantage of travel-related tax tips. Photo: Flickr user Simon Clancy.
7. Combine business and pleasure
If you're heading out on a business trip and can attach a personal vacation to it, you can enjoy some tax breaks. For example, if your airfare and hotel costs are not reimbursed by an employer or any other entity, and half your time was spent on business, you may be able to deduct half of them.
8. Deduct those job-hunting expenses
We're not in the healthiest of economies right now, so you might have spent some time looking for work in the past year. If so, and if you were seeking a job in your same line of work, then you might be able to deduct a portion of job-search expenses such as transportation, lodging, and resume printing.
9. Deduct moving costs
If you land a new job and it's at least 50 miles farther from your home than your last job was, you may be able to deduct your moving expenses -- so long as your new employer isn't covering them.
10. Profit from your home office
If you use a part of your home for a home office, you may be able to deduct expenses related to it (such as mortgage interest, utilities, and insurance). If you use one of your home's seven rooms as an office, for example, you might be able to deduct a seventh of the qualifying expenses. There's a simpler option available now, too, that offers a $5 deduction per square foot of your home office, up to 300 square feet, for a maximum $1,500 deduction. (Self-employed people have many other deductions they can take, too.)
11. Deduct alternative-energy investments
If you installed alternative energy equipment such as a solar energy system or a geothermal heat pump in your home, you may be able to deduct 30% of its cost. This credit is set to expire in 2016.
12. Be smart when selling your house
Finally, learn about the home sale exclusion if you're thinking of selling your house, because if you meet the requirements, you can shelter up to $250,000 of your gain on the sale of your primary residence from tax (and up to $500,000 if you're married and file your tax return jointly). That alone can be worth many tens of thousands of dollars in tax savings.
There are many more tax tips you could learn and take advantage of. The more you know, the more you'll likely save. But the above list of ways to lower your taxes could save you a lot by itself.
