With the end of the year rapidly approaching, there are several ways to boost your 2015 tax return. We asked three of our analysts what they plan to do before the end of the year, so you can make the same moves, and here is what they had to say.
The tax move I'll be focusing on this December is prepaying as many deductible expenses as I can. My goal is to boost my 2014 deductions as high as possible, and to do that, I'll be making some payments well before they're technically due.
For instance, state and local tax payments are eligible as itemized deductions, but to qualify, you need to pay them during the calendar year when you claim them. So, for instance, most homeowners pay their property taxes in two installments, but if you pay the full amount upfront, you can deduct it all on your 2014 return. Similarly, fourth-quarter estimated state income tax payments are usually due Jan. 15, but if you pay them a few weeks early, you can deduct them this year.
Prepaying deductible expenses only makes sense if you itemize your deductions, but it can be useful in a couple of common situations. First, if you expect your tax rate to be lower next year than it is this year, maxing out your deductions usually saves you on your taxes in the long run. Also, if you're right on the line between taking the standard deduction and itemizing your deductible expenses, doubling up every other year can let you take greater advantage of itemized deductions half the time while preserving your standard deduction every other year. Paying before you have to might seem like a waste, but the savings more than make up for the effort.
The most important tax move to make before Dec. 31 is to contribute to a 401(k) if you are able.
Like an IRA, a 401(k) offers tax-advantaged retirement saving, meaning that if you contribute to a traditional 401(k), your contributions will be tax-deductible, lowering your income when it comes time to calculate your tax bill for the year. However, there are some key differences between IRAs and 401(k)s. IRAs allow you to contribute until the end of the tax filing period -- that is, April 15. However, 401(k) contributions must be made during the calendar year, so your contribution must be in before Dec. 31.
Further, with 401(k)s you can put away far more money than you can with IRAs, which top out at limits of $5,500, or $6,500 for those aged 50 or older. For 401(k)s in 2014, you can contribute up to $17,500, and if you are aged 50 or older, you can contribute another $5,500 for a total of $23,000.
However, the big reason to contribute to a 401(k) is that many employers who offer 401(k)s also offer matching of a percentage of contributions. This matching means you effectively earn an immediate 100% on the money you contribute into your 401(k). You'd be hard pressed to find returns like that anywhere else.
The tax move I plan to make before the end of the year is cutting my losses on some investments that haven't gone the way I hoped. One of the best habits you can develop as an investor is to recognize when you've made a bad investment and move on, so take a look at your portfolio and see whether you should make any sales.
Thankfully, the IRS allows you to use investment losses to offset your capital gains. For example, if you made a profit of $1,000 by selling a stock, but you also sell another stock at a loss of $600, you'll only be taxed on $400 worth of capital gains.
If you didn't have any capital gains, you can still use up to $3,000 in investment losses to reduce your taxable income. And if you have more than $3,000 in losses, you can carry the excess over to next year.
So, if any of the investments you have made didn't quite turn out in your favor (hey, it happens to all investors), the end of the year might be a good time to cut your losses and move on. It always hurts to admit you were wrong about an investment, but at least you'll get a pretty nice tax break.