5 Year-End Tax Tips To Maximize Your Refund In 2016

Hand with taxes word isolated in whiteThink about taxes when it’s only October?

Most likely your 2015 tax return may be the furthest thing from your mind right now.

However, one of the best ways to maximize your tax refund is to be proactive about your tax planning before the year comes to a close.

The Motley Fool asked five of their writers what steps could be taken now in order to save some money on 2015 taxes.

Here is their advice.



Matt Frankel

One tax benefit to keep in mind that could be especially valuable this year is the ability to use any realized investment losses to offset your gains. For example, if you sold one of your stocks at a $2,000 profit and sold another at a $1,000 loss, only the $1,000 in net investment profit will be taxable as income.

There are some important details to know. For starters, you can claim investment losses even if your losses exceed your gains or you don’t have any gains at all. In this case, your taxable income can be reduced by the amount of your losses. In any given year, you can claim up to $3,000 worth of net investment losses, but any amount over $3,000 can be carried over to the following tax year.

Because of this ability to use investment losses as a tax deduction, many investors employ a strategy known as “tax-loss selling.” Basically, as the year comes to a close, it may be financially beneficial to sell losing positions in order to reap the benefits. So, if you have the misfortune (as I do) of some energy stocks dragging down your portfolio, it may be a good idea to take a long look at them and decide if the prospect of these stocks rebounding outweighs the tax benefits that would come from selling.

This can produce a substantial benefit — after all, a $2,000 investment loss can lower your federal tax liability (or boost your refund) by $500 if you’re in the 25% tax bracket. So, although it’s never fun when your investments lose, they can’t all be winners — so take advantage of the government’s effective subsidizing of your losses.


Selena Maranjian

There’s a big mistake that many investors make at the end of a year: buying into mutual funds just before those funds make their annual distribution of dividends and capital gains. It might seem smart to buy just before those payouts are made, but it’s not, because even though a fund might pay, say, $3 per share to its investors, the value of the shares drops by exactly that amount. So, you don’t really end up with a gain. Even worse, you are on the hook to be taxed for that payout — even though you may not have held the shares during the time they appreciated, creating the capital gain.

The smart move is to find out when, or if, the mutual fund will be making a significant distribution to shareholders — and to buy into the fund after that. These distributions often occur in December, and most major funds will publish the date of the distribution on their website. If you can’t find it, give the fund company a jingle and ask.

All this doesn’t hold for mutual funds held in tax-advantaged retirement accounts, such as 401(k)s, so don’t worry about those. It does hold for any distributions that you (wisely!) reinvest in extra shares. You might not collect any cash, but Uncle Sam will still tax you.


Sean Williams

Although it’s not exclusive to the end of the year, one smart tax tip that everyone should consider is adjusting their tax withholding status to match their taxable income.

Put plainly, Americans are addicted to receiving a refund from the IRS. In recent years, close to 80% of taxpayers wound up getting money back from the IRS (an average of roughly $2,800), which for many Americans is a way of forcing themselves to save money. However, allowing the federal government to hang onto money that you are due for extended periods of time (weeks or months) is actually bad news for you since that money earns no interest. What you’re really doing by not adjusting your tax withholding status is allowing the federal government to borrow money from you for free.

What should workers do instead? As we edge toward the end of the year, take the time to use a tax withholding calculator to gain a rough estimate of how much you might owe in taxes. Or, if you’re brave enough, consider making the calculations on your own by using the IRS’s federal tax tables to help calculate your tax liability. As a reminder, don’t forget your tax liability for Social Security or Medicare, especially if you’re self-employed.

Once you have a rough estimate of your federal tax liability you’ll be able to make the appropriate adjustments to minimize the amount you owe, and most importantly, minimize the amount of money the federal government is keeping without paying you a dime.


Dan Caplinger

In taking an early look at your taxes, it’s important to make sure you get the full benefit of any deductions you’re entitled to take. For many, that involves making year-end charitable gifts. To deduct those amounts, you need to make sure the gifts are done by Dec. 31.

If you’re planning to give cash or write a check, then waiting until the last minute isn’t that big of a problem. Where you can run into trouble, though, is if you take advantage of a useful strategy that involves giving away appreciated stock as a charitable gift. Ordinarily, if you sell stock that has gone up in value, you’ll owe tax on the capital gains. Yet if you give away that stock, you can deduct the full market value, and you won’t owe any tax because it’s the tax-exempt charity that ends up selling the stock after the gift.

The thing to keep in mind is that the process of making a charitable stock gift takes longer than a simple cash gift, so you should get the ball rolling well before the end of the year. By doing so, you can do good and give yourself some great tax savings in the process.


Jason Hall

One of the best tax-reducing tools at the disposal of many people is your employer-sponsored 401(k) or similar retirement plan. You can contribute as much as $18,000 of your salary (up to $24,000 if you’re 50 or over) in 2015, and if you contribute pre-tax contributions, then your taxable income would be reduced by the total amount of your contributions for the year.

In other words, if your tax rate is 25% this year, you’d reduce your federal income taxes by $4,500 this year by making the max $18,000 contribution. If you’re in the 50-and-over club and max out at $24,000, that’s worth $6,000 in tax savings at a 25% rate.

If you’re in the situation where you can benefit from increasing contributions over the next few months, you should be able to crank up your payroll contribution percentage for the rest of the year, and then back it down at the beginning of 2016. Some employers may also allow you to make one-off deductions to “catch up” for the year. Check with your human resources folks to find out if this is an option for you.


Source: USA Today