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Year End Tax Saving Ideas

If your income has significantly increased over the past few years, you could easily pay a combined federal and state tax rate of 30%-50%.  For every $1,000 dollars you reduce your income, you will save $300-$500 dollars in taxes.  As the end of year approaches, here are five tax saving ideas to consider implementing.  


1.  Maximize your Health Savings Accounts.  

For 2015, a family can contribute up to $6,650 in their HSA.  If you are within 10 years of retirement, consider saving these funds and building this account up to pay for your retirement health costs.  Another benefit is that investment growth will not be taxed.   


2.  Pay MN taxes due before December 31.  

This will get you the maximum deduction for federal taxes, especially if you have non-W2 income or received a significant W2 payment this year.


3.  Make charitable deductions before December 31.  

You need written proof of your deduction including language that you did not receive any resulting benefit.  Consider gifting appreciated stock to avoid capital gains taxes.


4.  Maximize your contributions to work 401k plans.  

Choose the regular 401k tax deferred option rather than the Roth 401k option (the Roth option does not reduce your taxable wages).  For those under 50, you can defer up to $18,000 of your wages.  If you are over 50, you can defer another $6,000 “catch up” amount.

5.  Minimize your net investment income (interest, dividends and capital gains) in your taxable brokerage account (non IRA accounts)

  • Interest income and nonqualified dividends are taxed at ordinary federal rates – your highest rate.  Increase your bond allocation in your 401k and IRA accounts to reduce taxable interest income.  Also, consider some investment in MN municipal bond funds, which are tax-free if you live in MN.
  • Capital gains for most couples are taxed at a federal 15% rate.  Those at higher income levels (adjusted gross income over $250,000) may also pay a 3.8% investment income surcharge.
  • Many mutual funds make taxable capital gain distributions in mid to late December.  Consider not buying stock mutual funds in December – wait until January.
  • For those investments with unrealized capital losses, for example this year energy/commodity investments, consider selling and realizing capital losses to offset some capital gains.  Be sure not to buy back these same funds for 30 days to avoid “wash sale” rules.