The holidays are upon us! And while those doctors who can are taking well-earned time off, other doctors are treating patients with alcohol-poisoning, seasonal affective disorders and holiday-related depression, car accidents from travelers on icy roads and the accountants are working overtime as we get to the end of the year. ‘Tis the season!
Why? Because people keep them busy with some end-of-year financial moves that you can make too!
Here are 5 great end-of-year financial moves you can make to help lower your overall taxes, improve cash flow, or both.
1. Max out your last 401(k) contribution
It’s too late to start your own solo 401(k) from scratch and get it going for the end of the year, but if you already have either a solo 401(k) or an employer-sponsored one, you can cut your tax bill this year by taking that last paycheck or two in December and maxing out your allowable retirement contributions.
While you’re at it, you might want to keep the pedal to the metal, because overall 401(k) contribution limits are increasing for 2015.
You don’t have to be in as big a rush for IRAs or Roth IRAs and their variants just yet: You have until April 15th to make your contributions for the year that’s just ending.
If you have access to an FSA, you can also try to make your final contributions, or commit those funds now so you don’ t lose them under so-called ‘use-it-or-lose-it’ rules.
2. Prepay some deductible interest
That includes home mortgage interest, student loan interest and any business loan interest you’ve accrued. The more interest you can pay and have it count for this year, the greater your tax deductions. Furthermore, the interest you pay doesn’t get to compound, either. So it’s a win-win.
3. Contract for advanced business services you’re going to use
This is mostly for those of you in private practice, and works best if you’re using the accrual method of accounting, or if you have a line of credit to tap to pay now for business goods and services you use in the next year. For example, if you pay now for a newspaper ad appearing in January, you’ll get to take the full tax deduction of the amount you paid this year. If you wait until January to pay the bill, you’ll have to wait a full year to reap the tax benefit. Prepaying advance contracts when these are tax-deductible business expenses or can generate tax benefits in the current year.
You can also prepay insurance premiums, rent, advertising, equipment leases, and nearly anything else, as long as you keep some rules in mind: The items can’t be capital investments that are expected to last longer than a year, and you cannot prepay more than a year in advance, or beyond the end of the next tax year. For more information, see IRS Publication 535 – Business Expenses.
4. Harvest some tax losses
This can be important if you had some profitable investments you sold this year, or that you would like to sell now. You will be assessed a capital gains tax, of course, on any investments you sell at a profit. But you can reduce the amount of profits you have exposed to the tax by selling something at a loss in the same year. Your gains and losses offset one another, and you are only charged on the difference between them!
For example, In April, you sold 100 shares of ABC stock, generating $10,000 in profits. Let’s assume you held them for well over a year, so they would generate long-term capital gains of up to 20 percent (depending on your tax bracket).
That’s a tax bill of $2,000 that you’ll owe, come April 15th.
But this week, you look at your portfolio and you discover that since that time, you own 1,000 shares in XYZ – a very similar company you’ve owned for years. If you sold your position now, you would generate $16,000 in losses!
If you sell your XYZ now, you haven’t really lost anything else. You already lost the money when the stock went down. So you sell it, booking $16,000 in capital losses.
So what happens now?
The first $10,000 in losses completely offsets your $10,000 in capital gains for the year. Your new capital gains tax liability is zero. You save $2,000.
But wait – there’s more.
You can also apply up to $3,000 in losses against ordinary income per year. So by taking those losses now, you can reduce your taxable income by $3,000.
That saves you several hundred in income taxes this year, depending on your bracket, deductions, etc. That also accounts for $13,000 of the $16,000 in losses you took.
But wait, there’s more.
The law allows you to carry up to $3,000 in unused losses forward to future tax years, if you can use them this year.
That means that in the year after next, you can still use that $3,000 to offset capital gains for that year. If you don’t have capital gains to offset, you can still use any unused capital losses to offset income for that year, too.
So a capital loss this year, could be the gift that keeps on giving – especially if you used the proceeds from the sale to invest in something else.
Just make sure you abide by ‘wash sale’ rules, which prevent you from buying a substantially identical security or investment to the one you just sold and still trying to claim a tax benefit. You don’t get to sell XYZ, book the tax loss so you can take advantage of the tax code, and then buy back the same stock at the lower price in the same month. You have to wait at least one month to buy back the stock.
5. Book convention travel now
If you book your professional/education-related travel, hotel and other expenses before midnight on December 31, you can add those to your deductions for the current year, even though the trips don’t take place until next year.
This is a big deal for any physician who has travel expenses and/or who participates in panels, conventions, trade shows or anything else requiring professional travel. The same goes for books and periodical/journal subscriptions. Pay now to lock in the tax deduction for this year.
Note: You can’t prepay for anything more than 12 months in advance for the purposes of managing your current year’s income taxes. Those businesses on the accrual method must also be able to show that all the events creating the transaction and the creation of the business liability take place prior to the end of the year. That doesn’t mean you have to have a widget in hand. You can recognize the liability as long as you have a contract in hand for the widget!
We hope these end-of-year financial moves gave you some good ideas to set you up for success!
Caution: Doctordisability.com does not provide tax advice. The information herein is for general purposes only and is not intended to constitute actual advice. For information pertaining to your specific situation, you should retain the services of a qualified and licensed tax professional.
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