Every year around this time, we hear about the same old things we should do by December 31 to save money on our taxes the following April. In this article, we'll provide some lesser-known tips and strategies for last-minute tax savings. We'll also share some arguments against taking commonly recommended measures like paying property taxes and the January mortgage bill in December. (For more suggestions, read 10 Money-Saving Year-End Tax Tips.)

TUTORIAL: Personal Income Tax Guide

Bunch Related Expenses into One Year

Some deductions aren't available unless your expenses in that category exceed a certain percentage of your adjusted gross income (AGI). For medical expenses, it's the amount that's more than 10% (7.5% if you or your spouse is 65 or older, through Dec. 31, 2016). For job expenses and certain miscellaneous deductions, it's 2%.

Here's an example of how this system works. If your AGI is $50,000 and you have $7,000 in qualified medical and dental expenses, you don't get to deduct $7,000 from your taxable income; you only get to deduct the expenses that exceed 10% of your income. Since 10% of $50,000 is $5,000, you can deduct $7,000 - $5,000, or $2,000.

It's better to be able claim something than to miss out on this deduction entirely. So, November and December is a good time to look at your actual medical expenses for 2015 and your anticipated medical expenses for 2016.

If you're close to crossing the 10% (or 7.5%) threshold for the current tax year, move your purchases of eyeglasses, dentist and doctor visits, surgical procedures and other medical and dental expenses to December to gain a tax deduction, advises Scott M. Estill, author of the book "Tax This! An Insider's Guide To Standing Up To The IRS" and a former senior trial attorney for the IRS. Likewise, if you have few medical and dental expenses for the current tax year, defer your purchases until the next one.

Numerous medical costs are tax-deductible, including LASIK eye surgery, doctor-prescribed weight loss programs, smoking cessation programs (but not patches or gum) and capital expenses for ramps, railings and other features installed in a home to accommodate disabilities, says John T. Hewitt, founder and CEO of Liberty Tax Service. (For related reading, check out Tax Deductions You May Be Missing.)

"Don't overlook medical mileage to and from doctors, hospitals and the pharmacy," he adds. Since January 1, 2014, the standard rate for medical mileage has been 23.5 cents/mile.

As for bunching your expenses, "The same idea works for miscellaneous itemized deductions, including investment advice, tax preparation costs, certain legal fees, safe deposit box rentals and so on," says Estill.

Consider Next Year's Tax Brackets

Before bunching expenses together, taxpayers should consider their overall tax brackets for this tax year and next year, Estill says.

"For instance, if I know my income will go up next year and thus I will be in a higher tax bracket, it may make sense to wait until next year to take the deduction because it will be worth more to me as a percentage of my income," he says.

If you jump from the 15% bracket in 2015 to the 28% bracket in 2016, your deductions will be worth 13% more in 2016, for example. A major tax bracket change might apply to you if your spouse was unemployed for most of 2015 but recently got a new job, or if you were a student in 2015 but will start working full time in 2016, among other possible scenarios.

"Likewise, if my income is expected to go down next year, it may make sense to try to accelerate the purchases into the current tax year," Estill adds.

Beware the Alternative Minimum Tax

The common advice to shift expenses from January to December to get the tax deduction a year earlier can backfire if you end up being subject to the alternative minimum tax (AMT).

What is the AMT? According to the IRS, "The tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax." (To learn more, read How To Cut Your Alternative Minimum Tax.)

Determining if the AMT applies to you is tricky and may require professional tax assistance. If the AMT does apply to you, you'll need to rethink your tax minimization strategy. "If you are subject to AMT, the benefit of being able to deduct property taxes disappears. It may be more advantageous to wait until next year to make the payment. Make sure you consult with a tax professional before you assume prepayment will result in income tax savings," he adds.

The same is true of state income taxes for the fourth quarter of the current tax year that you might elect to pay in December instead of January, says Estill.

The Bottom Line

Year-end tax planning isn't as simple as it seems. Rather than scrambling to reduce your taxes in December, a better strategy is to consult with a tax professional to develop an ongoing plan that you can implement over the course of the entire year, and change along the way if your income or expenses don't meet your predictions.

Related Articles
  1. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  2. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.
  3. Taxes

    Confused About Estimated Tax Deadlines for 2016?

    If you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
  4. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  5. Tax Strategy

    A Beginner’s Guide To Tax-Efficient Investing

    Tax-efficiency is a measure of how much of an investment’s return remains after taxes are paid.
  6. Insurance

    Jan. 31 is Sunday: Almost No Time to Duck Obamacare Penalty

    If you don't have health insurance, act NOW or you could owe penalties on your 2016 taxes, in addition to this year's.
  7. Retirement

    The High Net Worth Guide to Medicare

    In the years ahead, wealthy seniors will pick up an even bigger part of the Medicare tab. However, there are ways to minimize the bill.
  8. Philanthropy

    How Billionaires Around the Globe Give Back

    This list of foreign billionaire philanthropists is robust. Here's a list of rich entrepreneurs around the globe who have given back in really big ways.
  9. Retirement

    Your Retirement-Planning Team

    As you accumulate wealth, retirement planning can be too complex for just one person. The right team can help you avoid headaches and reach your goals.
  10. Investing Basics

    Know Your Stock Cost Basis

    A stock’s cost basis is its purchase price plus all reinvested dividends and commissions.
RELATED FAQS
  1. When should my tax refund arrive?

    More than 90% of income-tax refunds arrive in less than three weeks, according to the Internal Revenue Service (IRS). However, ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. Are Flexible Spending Account (FSA) items tax deductible?

    Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
  4. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  5. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  6. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
Trading Center