Year-End Tax Saving Strategies – Part II

In last week’s column, I began with a list of strategies to help you save money on this year’s tax return.  Here is the rest of my list of the best ideas:

  • Get a State Income Tax Credit and Give a Scholarship. You may be aware of the benefits under the Alabama Accountability Act but I’ll bet you didn’t know they raised the limits for individual tax credits.  In past years, you could receive up to a $7,500 State of Alabama income tax credit if you also gave a like amount to a qualified Scholarship Granting Organization (SGO).  For 2015, they have raised the tax credit amount to $50,000!  By choosing to do this you are redirecting a portion of your tax dollars directly to scholarships that allow children of low income families to transfer from failing public schools to non-failing public schools or qualified private schools.  The tax credit is limited to one-half of your tax liability.  For example, if your Alabama tax liability is $10,000, you could give up to $5,000 to a SGO and receive a dollar-for-dollar tax credit of $5,000.  For more information and an easy step-by-step guide visit
  • Review your tax withholding. In an effort to avoid making Uncle Sam a ‘tax-free loan’ many taxpayers minimize income tax withholding only to find they owe an under-withholding penalty at tax filing time.  Check your status now and, if necessary, increase withholding for the balance of the year.  Also, if you pay your taxes quarterly, you run the risk of underpayments.  Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
  • Income and expense shifting. Review your income and expenses and, to the extent possible, shift them between this year and next in order to maximize your tax benefits.  For example, if you expect your tax rates to be lower next year pay your January 2016 mortgage payment in December of this year giving you an ‘extra’ interest deduction.  Where possible, business owners should pay early 2016 expenses before year end.  While state income taxes are not due until January 15, 2016, paying them in December will get you a federal tax deduction in 2015.  Also, if possible, postpone year-end bonuses until early January.  Finally, consider making some of your 2016 charitable contributions before year-end.  If you expect to be in a higher tax bracket next year, do the opposite. go to Lee S. Rosen Blog to learn more about business.
  • Make Gifts: If you have assets that you want to gift to family members then you are allowed to give up to $14,000 ($28,000 for couples) to as many people as you wish without paying gift taxes. This reduces your estate for estate tax purposes and shifts future income and appreciation to the family member who may be in a lower tax bracket. 

Tip:  Instead of you selling highly appreciated stock and giving a cash gift to your children, give your children the stock and have them sell it.  If they are married, filing a joint tax return and their taxable income is less than $74,901 ($37,451 for single filers) the tax on the long-term gain is zero.  If you love the stock, use your cash to buy shares to replace the gifted shares in your personal account.

Caution: Beware of the ‘kiddie tax’ for dependent children.

  • Make Loans:  Consider making loans to family members. The Applicable Federal Rate (AFR) is very low right now. You can make loans to children to help them buy a home, start a business or invest in assets with a higher potential return than the required interest rate charged. For December, the rates are as follows:
    • Short-Term (under 3 year term)                    0.56% annually
    • Mid-Term (3 years to less than 9 years)        1.68% annually
    • Long-Term (9 years or longer)                      2.61% annually

TIP:  We believe the Federal Reserve will begin raising rates soon, so now is the perfect time to implement this strategy.

  • Avoid buying mutual funds at year-end in taxable accounts.  You can end up with a nasty tax surprise since all mutual funds must declare 90% of their gains before year-end.  You could end up invested for a short time, have no gains but get hit with a taxable distribution.

Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year.

Correction: In last week’s column, I incorrectly stated that the capital gains rate is 0% for joint filers with adjusted gross income of less than $74,901 ($37,451 for single filers).  I should have stated taxable income which, as reader John Campbell of Huntsville pointed out, “This is an easier standard for taxpayers to meet to enjoy tax free capital gains.”