For many people with budgets to manage, the holiday season just wouldn't be complete without some frantic year-end maneuvering to try to save a little money on the annual income tax bill.
Write a check to an overlooked charity, or make a gift to some worthy member of your family! Take a loss on some laggard investment! Find a way to defer some income until after Jan. 1!All right, so a sudden spurt of activity in the last few days of the year isn't the recommended way to approach a matter as important as planning your financial affairs.
Nevertheless, there are quite a few eleventh-hour steps you can take, before the bells toll at New Year's, to make filling out your tax return in February, March or April a more pleasant exercise.
The idea, first of all, is to minimize taxable income you receive, and maximize the deductible expenses you pay, before the end of the year, so that the "taxable income" and "total tax due" lines on your 1995 return to Uncle Sam will be as small as possible.
This operating philosophy applies for most taxpayers, except in cases where you know you will be in a higher tax bracket in 1996 or have some other cause for wanting to save deductions for next year.
Tax advisers say the usual ideas are still generally valid this year, even with legislation pending that could change some important rules of the game such as capital gains rates.
What follows is a sample checklist of last-call planning ideas:
- Defer income. If you have any payments coming, such as a year-end bonus, which allow you any discretion over timing, ask that the money be delivered after New Year's. Self-employed workers can delay billing clients until then.
- Accelerate deductions. Pay any balances due on state and local taxes by Dec. 31. If you are close to minimums for deductibility of any category of expenses, such as medical or miscellaneous deductions, bunch those to gain the maximum deduction possible.
Prepay charitable contributions you might have planned for next year, making sure to get the required detailed receipts for any individual contributions of $250 or more. Consider giving appreciated stocks or mutual funds directly to charity, thus avoiding capital gains tax and gaining the right to deduct the full market value at the time of donation.
- Balance capital gains and losses. Sell, any time before the close of business Dec. 31, an investment on which you have a loss. The amount of the loss can be deducted against your other income, up to $3,000 per year. It can be used without limit to offset capital gains realized during the year - including year-end capital gains distributions made by mutual funds you own, on which you will owe taxes even if you didn't sell any shares.
- Use your annual gift exclusion. "Every year you may give $10,000 ($20,000 if your spouse joins in the gift) per donee with no federal gift tax consequences," notes the accounting firm of Deloitte & Touche in Wilton, Conn. "Using these exclusions from gift tax annually to the maximum extent continues to be one of the best estate planning strategies."