7 Ways to Quickly Change Your Tax Bill
It may be the end of the year, but it’s not too late to affect your 2015 tax bill. Here are some quick hitting ideas you can take action on now.
Every December I get many questions about last-minute steps people can take to lighten the burden of the looming April tax bill. Although I am not really an advocate of hasty decisions (I prefer good planning), there may be a good reason to act quickly to make your tax position better. Maybe you got a year-end bonus that changed your overall income and has you strattling tax brackets. Or maybe you never really got the chance to plan well throughout the year. Do yourself a favor and make yourself a New Year’s resolution not to let that happen again! Whatever the case, here are 7 ways you can take action now to impact your taxes for the year.
- Pay Yourself
- Bunch Your Expenses
- Make Things New
- Hold Off on Purchases
- Defer Some Income
- Delay the Bonus
- Give to Others
One of the first things I would tell someone trying to reduce their tax bill is pay yourself. What do I mean? Fund your retirement. If you’ve heard me talk about my concept of Tax Efficiency, you know that money contributed to retirement is the most tax efficient spending we can engage in; particularly if we are business owners. And the great news is we don’t have to make this tip happen by the end of the year to reap the benefits.
You actually have until the tax return due date to deposit the money into a retirement account. So for an individual tax return (Form 1040) that is April 15. If you are a business owner, that contribution needs to be made by the original due date (typically March or April 15),
can actually be delayed until an extended due date if you are not able to file timely. Plus when you fund your retirement, you really are paying yourself. That is wise from a financial planning perspective.
BUNCH YOUR EXPENSES
Okay so this tip may sound a little silly. What does “bunch your expenses” mean? Let me give you a bit of background. Some tax deductions have floors to them. That means that you need to spend a certain amount before the deduction actually kicks in. One of the biggest floors out there is the 10% floor on medical expenses. In order to be able to deduct our out-of-pocket expenses for trips to the doctor, dentist or phramacist, we need to cover 10% of adjusted gross income first. Only then can we start benefitting from a tax deduction. That 10% floor is typically hard to reach unless we have some very big medical event(s) during the year. But it can be easier to reach if you bunch your expenses.
For example, if you know you are going to buy some prescription eyeglasses or contacts next year and you have the ability, why not buy them now? You’d be pulling those expenses from next year into this year and “bunching” them for tax purposes. Maybe you can stock up a little on a prescription you take regularly.
you can see the doctor a bit early for a nagging problem. You get the idea. This approach is really effective for any type of tax deduction where there is a floor.
MAKE THINGS NEW
Okay this tip probably sounds funny too. “Make things new?” Yes. If there are tax deductible purchases you can make and you’ve got more money than you planned, make them now. This is particularly wise for business owners that need to upgrade a piece of equipment or have plans to expand their business.
As an example let’s say I know I am going to hire 2 new employees next year and I know I need furniture and computer workstations for them. This is a great time to get those items and take the tax deduction in the current year. Maybe you could stand to upgrade your company vehicle. Or maybe the current vehicle could use a new transmission. Take care of it now and capture the tax deduction. In the home, you may consider energy-efficient or renewable energy purchases leveraging tax credits that are still available. Some of these credits are even available for second homes
to you rental and vacation property owners). If you know you really should be buying something next year and you have the means to do it this year, it may be wise to purchase a little early.
HOLD OFF ON PURCHASES
Okay to this point we have assumed that we had more income during the year than expected. What if that isn’t the case? Perhaps we lost a big customer during the year and we haven’t yet made up for that revenue in our business. Or maybe we changed jobs during the year and went without a paycheck for a while. Whatever the reason, we can be smart about deductions in a down year as well. In that case, let’s push things into next year and use the bunching concept I described earlier; only for next year. You can do that with those same, non-critical medical expenses. You can do it with property taxes if you are not escrowing your taxes.
about anything that we are able to “pull forward” into this year can be “pushed away” into next year. That could make sense for you.
DEFER SOME INCOME
I’m talking to business owners out there with this tip. Deferring income is essentially moving that income into the next year. That works particularly well for contractors or anyone that does work on projects that take a while to complete. Let’s say you are working a 6-month project that has milestone payments spread out through the course of the project. Perhaps that work is just about to wrap up at the end of December and you’d be receiving the final payment. But what if you actually have the flexibility to complete the work in early January and defer that last milestone payment?
it makes sense based on your tax situation, that action could reduce your tax bill this year which may be what you’re trying to accomplish.
DELAY THE BONUS
I began this conversation by mentioning that a bonus may have caused you to earn more than planned. Certainly that’s a good thing. It’s also potentially a bad thing. If the reason it’s bad is because it forces you into the next higher tax bracket and you don’t expect that same level of income next year, why not go to your employer and ask them if they will pay that bonus out next year instead of now? If they do it early enough in the year (I’m talkin’ the first few weeks) they get to take the deduction for this year for their tax purposes and you won’t recognize that income until next year.
you can hold off on the gratification of receiving that money for a little while, you can actually keep more of it in your pocket. Now there’s a concept!
GIVE TO OTHERS
This last tip is in the spirit of the season. One thing we can always do is give to others. If there is a cause that matters to you and you have extra taxable income this year, now is a great time to make a charitable donation. Just make sure that you are actually donating that money to a non-profit organization (charities, religious organizations, etc.) and not giving directly to individuals. While giving directly to a needy family is awesome (my family does it), it’s not tax deductible. Don’t forget my tip on bunching when it comes to your charitable giving. Aside from need-based giving, if you’re a business owner, maybe you can be the one giving those employee bonuses we’ve been talking about and take the tax deduction in your business.
The bottom line is there are 365 days in a year that you can make a decision that impacts your taxes. I would much rather see my clients being deliberate about their tax situation and planning throughout the year. That is why I place such an emphasis on it in my firm. However, those last few days of the year are no less valuable and if you’re the type of person that likes to Christmas shop right up to the big day, this is your time! Take action now to impact your taxes. It’s a nice gift to yourself.