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Start strategizing now to keep next year's tax bill low

Taxes
Anne Rippy | Getty Images

Taxpayers may be shelling out less in taxes than they think, but inevitably still more than they'd like. And if you want to cut next April's tax bill, now is the time to start strategizing.

After accounting for current progressive tax rates, deductions and credits as well as payroll taxes, average taxpayer will pay $16,582 in federal taxes for 2015, according to new data from Tax Policy Center, a joint project of think tanks The Urban Institute and Brookings Institution. That's an effective tax rate of 19.8 percent.

But accountants and financial planners say there's plenty taxpayers can do to cut their tax bill, especially with a long timeline to strategize. "This is a good point to take a snapshot of what's happened so far this year," said Tim Gagnon, an assistant teaching professor of accounting at Northeastern University's D'Amore-McKim School of Business. "It's easier to adjust over almost six months than in a few weeks at the end of the year."

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First things first: Consider any big income shifts this year that could require specific planning. "You're halfway through the year, you probably have a good idea," said Gagnon. "April is a lousy time to find out there's a big bill."

A bonus, profitable home or investment sale or Roth IRA conversion, for example, could easily push someone into a higher marginal bracket. Joint filers with an adjusted gross income exceeding $250,000 could also find themselves subject to the additional 3.8 percent net investment income tax and 0.9 percent Medicare tax, said certified financial planner Mark Prendergast, director of tax strategies for Inspired Financial in Huntington Beach, Calif.

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Here are some strategies to minimize what you'll pay:

Max out retirement contributions. It's an easy first resort to reduce taxable income. "This is a good time to make sure you'll hit all the limits," said Amy Wang, a senior technical manager on the American Institute of Certified Public Accountants' tax advocacy staff. For 2015, consumers can contribute up to $18,000 into a 401(k) or 403(b) plan, with an extra $6,000 in catch-up contributions possible for people are 50 and older.

Traditional IRA contributions may also be deductible, depending on your modified adjusted gross income and whether you (or your spouse) are covered by a retirement plan at work. For 2015, those contributions max out at $5,500, plus an extra $1,000 for people age 50 or older.

Boost other contributions, too. Retirement accounts aren't the only potential tax-saver. See if you can sock away more in your child's 529 college savings account, for example, said Gagnon. There's no federal tax break, but many states offer residents deductions or credits. Another option: Health savings account plans, which may allow for lump-sum deposits or increased contributions up to the maximum $6,650 in 2015 for families, plus an extra $1,000 for people age 55 and older. Contributions reduce users' taxable income, with tax-free withdrawals for medical expenses at any age.

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Tax-loss harvest. It's never too early to start looking for losing investments in your portfolio, said Prendergast. "You try to realize those losses to offset the gains you've already realized," he said. Taxpayers can use that strategy to zero out their capital gains, and can then deduct up to an additional $3,000 in capital losses against other income for that year. (Be aware of wash-sale rules if the sale is solely for that tax advantage, and you'd ultimately like to repurchase the security.)

Plan out donations. The right strategies could lower your tax bill in several ways. "One of the great ways of doing it is donating appreciated securities," said Prendergast, who is also a certified public accountant. "You avoid the capital gains tax entirely and get the full market value of the security as the donation," he said, as well as reduce your taxable income at the highest marginal bracket.

Donor-advised funds could be another option, letting you take a deduction this year and decide in future years how that donation will be distributed, he said. Consumers age 70.5 or older who must take a required minimum distribution might also donate directly from their IRA. That satisfies the RMD and reduces gross income, he said.

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Monitor deduction thresholds. Mid-year is a good point to check in on deductions that require expenses to total more than a set portion of your adjusted gross income, said Wang—notably, the 10 percent threshold on medical and dental expenses (7.5 percent if you or a spouse are 65 or older). Plenty of eligible expenses fly under the radar, including the transportation costs of getting to and from doctor's appointments and the cost of physician-recommended weight-loss programs. Tallying those expenses now can help influence health decisions in the second half of the year, she said, like whether to replace prescription glasses this year or next.

Track expenses. Start saving and sorting deductible expenses now, so you don't forget anything when it comes time to file next year, said John Wheeler, a certified public accountant and certified financial planner with Castle Wealth Advisors in Indianapolis. "Keep an eye to things you could contribute to or take advantage of that would add to your deductions," he said. That might be non-cash charitable donations, summer camp fees for the dependent care credit, or big-ticket purchases for a sales tax deduction.