Probably the last thing on your mind at the end of the calendar year is your 2015 tax liability. However, now is a great opportunity to take these four steps to lower your tax liability which may be due next spring. A few proactive steps now may significantly change your 2015 taxes and help you avoid any surprises when filing your 2015 taxes.

  1. Examine Your Tax Bracket. For 2015, the top income tax rate is 39.6% for individuals with taxable income over $413,200 ($464,850 if you're filing jointly with your spouse). If you think your 2015 income will reach this threshold and may not repeat next year, consider ways to reduce your taxable income by either deferring income or accelerating deductible expenses. Often, a year-end bonus or a stock sale may be discretionary, or the timing of the decision may be delayed until the following year. Sometimes, a charitable donation helps to satisfy both your charitable plans and help reduce income that would be subject to the top income tax brackets.
  2. Account for the 3.8% Net Investment Income Tax (NIIT). The NIIT is a surtax that is applicable if your 2015 modified adjusted gross income (MAGI) is more than $200,000 ($250,000 filing jointly).NIIT applies to your net investment income for the year or the excess of your MAGI over the threshold, whichever is less. You can lower your NIIT tax liability by reducing your MAGI, reducing net investment income or a combination of both. Your options may include generating capital losses or paying investment expenses before the end of the year.
  3. Analyze Your Investment Income. The capital gains rate is 20% for taxpayers in the 39.6% tax bracket this year. If you have (or are expecting to have) significant gains, you may want to reduce your gain with offsetting losses by selling some depreciated investments. Although the capital losses may be helpful to offset your capital gains, you should be aware of the impact of your tax decisions on your investment portfolio and the limitations of wash sale rules to repurchase your investments within a 30-day period.
  4. Check Your Withholding and Estimated Tax Payments. Keep track of required quarterly estimated tax payments to avoid underpayment penalties. Be aware that falling behind on estimated tax payments and making them up later in the year generally will not prevent underpayment penalties, unless significant income came later in the year. However, you can make up the difference and avoid (or reduce) penalties by increasing income tax withholding. Withholding can come from your year-end salary, IRAs or Social Security. It will be treated as if it had been paid ratably during the year. Some Illinois workers may experience a reduction in withholding caused by lower Illinois tax rates (3.75%) in 2015. If so, then your Illinois estimated tax payments may need to be adjusted to make up the difference in tax payments. Also, your Federal income tax may be higher due to lower state tax deductions. It may help to plan ahead for your 2015 taxes with a tax projection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.