Welcome back from the July 4th break. I hope you had a great Independence Day.
Our country's birth was brought about in part as a protest against taxation without representation. We still have taxes 239 years later, but at least we now have a Congress and state legislatures that are, sometimes, more receptive to our tax concerns.
And while most of us will never be totally independent of taxes, we can make some moves to reduce our tax hassles and bills. July, the heart of summer and the beginning of the second half of the tax year, is the perfect time to make some tax-smart moves.
Here are six easy ones.
1. Adjust your payroll withholding.
I know, I am a broken record here. But I hate that Uncle Sam gets so much taxpayer money as interest-free loans when folks get big refunds. That's almost as bad as owing the Internal Revenue Service when you file your return. Both of these situations mean that you need to refine your payroll withholding. You want the amount of federal income tax that comes out of your paychecks to add up as closely as possible to your eventual tax bill.
You can get a good estimate by using the IRS online withholding calculator. You also should tweak your withholding every time there's a change in your life that affects your taxes, such as getting married, a growing family or buying a house. Once you know your proper withholding amount, just give your payroll administrator a new W-4.
2. Re-estimate your estimated tax payments
If you have income from sources that aren't subject to withholding, such as investment earnings or a freelance job, then you need to be making estimated tax payments. If you don't, or don't make enough in each quarter, you could face a tax penalty. Monitor your income and expenses so that you know if you need to adjust your estimated payments. You have two left for 2015, on Sept. 15 and then Jan. 15, 2016.
There is, however, a safe harbor amount you can pay to avoid a penalty for paying too little via 1040-ES. Pay at least 100 percent of the tax you owed last year or 110 percent if your adjusted gross income (AGI) last year was more than $150,000, or pay 90 percent of the tax you'll owe in the current tax year.
If you're married and file a joint return, both spouse's withholding and estimated payments count. Since I'm the total independent contractor, I've had the hubby some years bump up his payroll withholding to ensure that our combined estimated and withholding amounts hit the 100 percent tax payment safe harbor. That's easier to do when you make the change midyear instead of with just a few weeks left in 2015.
3. Set a bunching strategy
If you itemize instead of use the standard deduction, you need to look at your tax deductible expenses so far. Too often, Schedule A filers find they're just short of the amounts needed to claim expenses that are subject to deduction thresholds. This is the 10 percent of AGI (or 7.5 percent if you're 65 or older) to claim medical costs or 2 percent of AGI for miscellaneous expenses, such as unreimbursed business expenses or job search costs.
You can avoid coming up short by looking at what expenses qualify, what you've spent so far and what you can spend to get you over the deduction hurdle. In tax-speak, this is known as bunching. And it's much easier to meet these deductible expenses amounts over six months instead of the final days of the tax year.
4. Evaluate your investments
It's important to keep a close eye on your assets, not just to ensure that they are appropriate for your financial goals, but also to ensure they don't produce any unwanted tax surprises. For most investors, income from their holdings — qualified dividends, capital gains distributions or capital gains if you make a profit on an asset's sale — will be taxed at a maximum 15 percent rate. Some people won't owe any capital gains taxes.
Even though the rates are lower than those on ordinary income, you can trim investment taxes even more by selling some losing stocks. Those losses then can be used to offset your gains.
If you don't have any losers, good for you (and can you spare an investment tip or two?), but you also might want to rebalance your portfolio. This, too, could have a tax advantage. By selling when a holding is at a high point, known in tax-speak as harvesting capital gains, and then repurchasing the asset allows you to reset your basis so that future sales won't cost you as much in taxes. Don't worry about the wash sale rule here; it only applies to losses used for tax purposes, not gains.
5. Give to charity
Charitable donations are tax deductible if you itemize. Even better, there's no threshold amount to meet. Most of us typically can deduct the full value of our contributions, cash or the fair market value of goods, on your Schedule A.
We tend to think about charitable giving at the end of the tax year, but charities will happily take your gifts in the summer, too. So if spring slipped by without you doing any planned cleaning out of closets, do so now and head to your favorite charity with items. Or write the nonprofit a check. Just be sure to keep records of all your charitable gifts for your tax records.
6. File your 2014 tax return
This is a tip that applies to me personally. I got an extension back in April to file my 2014 Form 1040. Six months seemed like plenty of time back then, but now the deadline — which is being ticked off in the countdown clock there in the ol' blog's right column — is getting closer every day.
So that you don't find yourself rushing to meet the Oct. 15 ultimate filing deadline, work on and complete your tax filing this month. This July task definitely is on my personal tax to-do list!
But wait, there's more: You should be able to take care of any of these tax tasks that apply to you quickly, and soon be back on the beach or golf course or spa.
But if your favorite leisure pursuit is trimming your taxes — hey, it could happen! — then check out the ol' blog's right column. You'll find even more July Tax Moves there under that bright red heading.
Savings from these midyear tax moves could help pay for an extended summer vacation!
