Income tax is likely the last thing on your mind as the holiday season kicks in, but now is perhaps the best time to start strategizing for your 2015 return, said Manisha Thakor, CFA, director of Wealth Strategies for Women at Buckingham and The BAM Alliance.
Thakor pointed to three "powerful" steps you can take at the end of the year that, if done correctly, "will make a big difference."
First, engage in "income shifting" and/or deferral. The former means transferring income from a high-tax-bracket person in your household to one in a lower bracket. The latter means taking advantage of opportunities such as your employer's salary or bonus deferral program. "And, of course, anyone who is participating in a retirement program is engaging in tax deferral one way or another," said Thakor.
The second step is "deduction clustering." Using this strategy, you take the standard income-tax deductions one year but cluster your itemized deductions the following year. The most common such deductions deferred include property and state and local income taxes, charitable deductions and, if you own rental properties, rental expenditures.
Thakor's final suggested step is tax-optimizing investments — and there are two approaches. The first, classic tack is tax-loss harvesting, scouring your taxable investment accounts for any losses you can realize. "Another key thing you can do is take a look at the nature of the dividends and interest you're getting in your taxable portfolio."
The second tactic, Thakor's favorite, is shifting your portfolio investment strategy to an index-based or, as she terms it, "evidence-based" approach.
"As you're thinking about the holiday season ... add this to your to-do list," Thakor said. "Focus on tax preparation in the fourth quarter, and sail into the new year in great shape."
