Expecting to be forgiven all or part of a loan? Try to put off the forgiveness until after the first of the year. This way, you will have another year to pay any tax that will be due on forgiven debt.
Pay off any accrued interest before the end of the year. You can deduct interest on qualified student loan debt – but only if you pay for it yourself.
Currently enrolled? Or plan to be? If your coursework is job-related, and you need that coursework to advance in your profession, you can deduct tuition, fees, books and other expenses. If you’re planning to enroll in the Spring semester, pay the tuition bill before the first of the year. That way you get the benefit of the tax deduction this year rather than next year. This is sound planning as long as you believe you will not be in a significantly higher marginal income tax bracket in 2016 than you were in 2015.
Note: These costs are not tax deductible if the coursework qualifies you for a new profession. It only applies if you have costs in your current profession.
Start your own company, and create a written employee education assistance program. This allows you to set aside up to $5,250 per year, tax free, as long as you use it to pay off student loans. Get the plan in place by the end of the year, and you pay up to $5,250 this year and every year after that with tax-free dollars. You can do this with freelance/self-employment income. However, if your company ever has employees employees besides yourself, you have to provide the same benefit to them as you do to yourself. You cannot discriminate in favor of management.
Maximize your contribution to an IRA or Roth IRA.
You can put up to $5,500 in a traditional IRA or a Roth IRA. If you choose to contribute to a traditional IRA, you can deduct contributions from this year’s income – provided you don’t earn too much money to qualify. Your deductible contribution can help push your adjusted gross income down, which may help you qualify for a slightly lower loan payment if you are on an income-based repayment plan. However, with a traditional IRA, you can make non-deductible contributions at any level of income, as long as you have sufficient earned income for the year.
Married? You and your spouse can contribute up to $5,500 each, using the spousal IRA provision. This is true even if one spouse does not have earned income.
Sell losing investments.
Do you have investments outside of a retirement account that have lost money? You can sell those and buy something else, or just take the cash – and get a tax break. When you sell an investment at a loss, you can claim a capital loss, and offset any capital gains you have on investments you may have sold at any time during the year. If you have more losses than gains, you can apply up to $3,000 in capital losses against income every year. That is, you can reduce the amount of income you pay income taxes on by up to $3,000 per year. And if you have more than $3,000 in losses, you can carry the excess forward and apply it in future years – first against capital gains, and then against income. This technique is called “tax loss harvesting.”
Either way, you benefit.
You just can’t game the system by selling to claim the capital loss and buying the same thing back right away. You have to wait at least 30 days to buy the same investment or a substantially identical one back. But you can buy something that’s very closely correlated, with no problem.
Convert IRA balances or old 401(k) balances to Roth IRAs
If you think your tax bracket now will be lower than your tax bracket in retirement, you may consider converting tax-deferred IRA balances to Roth accounts, which grow tax-free and provide for tax-free retirement income. You can do the same with old 401(k) balances from former employers. You roll them over into a traditional IRA and then covert the traditional IRA to a Roth account. You have to pay income taxes on amounts you roll over, but then you never have to pay income taxes again on those accounts, if you manage the properly. For best results, use money you have outside of the IRA to pay the taxes. Don’t rely on IRA rollover proceeds to pay income taxes.
Prepay certain deductible expenses.
You can boost available deductions in the current tax year by paying them before the 31st of December. For example, make that January mortgage payment in December, so you can deduct that much more in mortgage interest. You can pay your 2016 real estate tax bills early, too, to push your deduction into this year. The same goes for anything you use for business purposes: Smart phone upgrades, internet bills, expenses on a car you use for business, travel expenses, anything you can pay this year rather than next year may reduce your taxable income and self-employment income taxes. (This technique assumes you are using the cash method of accounting, rather than the accrual method. Under the accrual method, you can book the expense when you contract for it, rather than when you pay for it).