If you itemize deductions, consider accelerating some deductible expenses into 2015. This strategy could produce a tax benefit if you expect to be in the same or a lower tax bracket in 2016.
An easy deductible expense to prepay is your mortgage bill on your primary residence or vacation home due on January 1, 2016. Paying your January bill in December will give you 13 months’ worth of deductible interest in 2015.
Warning – if you prepay your mortgage in 2015, you'll have to continue the policy for 2016 and beyond. Otherwise, you'll have only 11 months’ worth of interest in the year you stop.
You can also prepay state and local income and property taxes due early next year to use toward deductible expenses in 2015.
Other expenses to consider prepaying for deduction purposes are medical costs and costs such as investment expenses, job-hunting expenses, unreimbursed employee business expenses and fees for tax preparation and advice.
These expenses are subject to deduction floors based on a percentage of your adjusted gross income, meaning you can deduct such expenses only when they exceed the applicable floor. For medical expenses, that floor is 10% of your AGI for most taxpayers, while for the other expenses listed above, the floor is 2%.
If year-to-date you’ve exceeded the floor — or you're close to doing so — consider accelerating additional expenses into 2015. But if you’re nowhere near the qualifying levels, defer expenses until 2016 if possible to help you potentially exceed the floor then.
Make sure that the Alternative Minimum Tax is not triggered before you proceed with these strategies. We can let you know if you might owe AMT for 2015.
Check out our prior year end tax tips, and look for more in the coming days and weeks. Check back here regularly for more tips - or call us for custom advice for your business or personal tax returns.