7 Smart Year-End Tax Moves for 2015

This year hasn’t been kind to investors. Falling oil prices, the slowdown in China and uncertainty about the U.S. economy have pummeled portfolios and fanned speculation about a bear market. That could put a real damper on your holiday festivities. But with the end of the year approaching, you can turn your lemons into a sparkling cocktail with a citrus twist. Use your losses to lower your tax bill, and you’ll be in a celebratory mood when you do your 2015 tax return next year.

To take advantage of tax-saving losses, you must sell depreciated stocks or mutual funds that are in a taxable account, not your 401(k) or IRA. (However, if your traditional IRA has declined in value, it may be a great time to convert some or all of the money in it to a Roth; see Reap the Rewards of a Roth IRA.)

Losses you claim are first used to offset any profits you’ve locked in by selling investments during the year. So if you have stocks or funds that performed well but may have peaked, your losses may allow you to cash in without triggering a big tax bill. Investments you sell that you’ve held for one year or less produce short-term gains or losses. After you match up short-term losses with short-term gains, you’ll match up long-term losses with long-term gains. You can deduct net losses of one type against gains of the other type.

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After you’ve run out of gains to offset with losses, you may use up to $3,000 of the remaining losses to offset other types of income, such as your salary or distributions from an IRA. You can roll over unused losses to future years until they’ve all been used.

When harvesting losses, don’t get tripped up by the “wash sale” rule. Suppose you have a stock in your portfolio that has sustained some serious damage but still has long-term potential for growth. If you sell it at a loss, you must wait more than 30 days before repurchasing it. Otherwise, the IRS will prohibit you from claiming the loss on your tax return. You can buy a stock in the same sector without triggering the wash-sale rule. If you sell a mutual fund at a loss, getting around the wash-sale rule is easy: Simply buy another fund that invests in similar securities.

Good housekeeping

There weren’t any big changes in the federal tax code this year, and given the ongoing gridlock in Washington, it’s unlikely lawmakers will do more than tinker with the code in 2016. That means the standard year-end advice still makes sense for most taxpayers. Unless you expect your income to rise next year, try to claim as many deductible expenses as possible by year-end so that you can take the write-offs sooner rather than later. For example, pay your January mortgage bill before December 31 so you can deduct the interest on your 2015 tax return. Make sure your charitable contributions are made before the end of the year, too. If you use your credit card to make donations by New Year’s Eve, you can deduct them on your 2015 tax return, even if you don’t pay the bill until next year.

Deferring income will kick the tax bill down the road. For example, if you’re lucky enough to get a bonus, your employer may agree to postpone giving you the check until January. Companies can generally deduct the payment for the current year as long as you receive the bonus within two and a half months after the end of the tax year. Self-employed taxpayers can defer income by waiting until January to bill clients.

Deferring income is also a good idea if you’re the parent of a high school senior, college freshman or college sophomore. Because of a change in the Free Application for Federal Student Aid (FAFSA), your 2015 income will count twice for financial aid purposes (see Filing FAFSA for Financial Aid to Get Easier in 2016).

There’s still time to stockpile money in tax-advantaged retirement accounts. You have until April 15 to contribute to an IRA, but you must arrange to deduct extra 401(k) plan contributions from your 2015 paychecks or year-end bonus. Deductible contributions will reduce your taxable income and your adjusted gross income. That’s particularly important for taxpayers who are close to the threshold for the 3.8% surtax on investment income. The surtax affects investors with AGI of $200,000 or more ($250,000 for married couples). The surtax is owed on your investment income or the amount by which your AGI exceeds the threshold, whichever is less.

The season of giving.

For the vast majority of families, the federal estate tax is not a problem. The 2015 estate tax exemption, which is adjusted annually for inflation, is $5.43 million, or $10.86 million for married couples. But 13 states and Washington, D.C., have lower estate-tax thresholds than the federal government. In New Jersey, for example, estates valued as low as $675,000 could be taxed.

You can reduce your exposure to these taxes by giving assets away while you’re still alive. In 2015, you can give cash, securities or other property valued at up to $14,000 to as many people as you want without filing a gift-tax return or dipping into the credit that will protect your estate from the federal estate tax.

Giving away securities that have gained in value is a tax-smart strategy, particularly if the recipients are in a lower tax bracket than you are. When they sell, gains that would have been taxed at up to 23.8% on your tax return will be taxed at a lower rate. If the lucky recipients are in the 10% or 15% tax bracket, they can sell the securities without paying any federal capital gains taxes. Likewise, donating appreciated securities to charity is both generous and smart. If you have owned the securities for more than a year, you can deduct their value on the day you made the donation.

Securities that have declined in value, however, make lousy gifts, says Greg Rosica, a certified public accountant and contributing editor to the Ernst & Young Tax Guide. You can’t claim a tax break for the loss, and the recipient can’t, either. A better strategy: Sell the securities and give the proceeds to family members or your favorite charity. That way, you can use the losses to offset capital gains or ordinary income.

As has been the case for the past several years, we’ll have to wait to see whether Congress renews a tax break that allows seniors age 70½ or older to donate money from their IRAs directly to charity. The provision, which allowed tax-free transfers up to $100,000 to count toward the required minimum distribution, expired on January 1. Congress has revived the tax break in the past, and it is expected to do so again this year. If you’d like to make a charitable rollover, hold off on taking your RMDs for a few more weeks. Be prepared to act fast, though, if it looks as if the provision won’t be extended. The penalty for not taking your RMD by December 31 is 50% of the amount you should have withdrawn.

Other ways to give

If you’re feeling really generous (and worried about estate taxes), consider these giving strategies:

Pay the college bills for a grandchild (or anyone else). Direct payments to a college or university to cover tuition aren’t subject to the gift-tax rules, so you can give more than $14,000 a year without worrying about the tax. You can also stash up to five years’ worth of annual gift exclusions in a 529 college-savings plan in one year. That’s up to $140,000 for a married couple. The money won’t be included in your estate, but you’ll maintain control of the account.

Pay someone’s medical expenses. Direct payments to a medical service provider are also exempt from the gift-tax rules. You can use this exemption to help family members pay medical bills.

Quiz: Is It Tax Deductible?