Too often, one thinks about their federal income tax bill only shortly before the April 15 deadline, which is too late. The time to think about how to minimize your taxes is during the year when you can accelerate deductions or defer income. Nevertheless, here are a couple of last-minute tips to consider:
1. IRA contributions: About the only thing you can do in 2015 to save taxes on the 2014 return is contribute to an IRA, and even then, you can't exceed an AGI (adjusted gross income) threshold if you are covered by traditional pension plan. However, if you own your own business, you have until Oct. 15 (if you extend your return) to make a deductible contribution to a Simplified Employee Pension (SEP) plan for 2014.
2. Timely filing: Even if you don't have the money to pay the tax, file by April 15 to avoid the failure-to-file penalty of 5 percent per month on the unpaid tax. If you file timely, you will still be subject to a failure-to-pay penalty, but it is only one-half of a percent per month and can be reduced if you have an installment agreement. (See below.)
3. Extension: If you have fully paid your tax by April 15, filing an extension can give you more time to assemble documents and evidence to file accurately and maybe think of other deductions. By filing Form 4868 rather than Form 1040 by April 15, you will have until Oct. 15 to file the return.
4. Installment agreements: If you don't have the money to pay the tax, attach Form 9465 to the return and offer to pay off the tax in monthly installments withdrawn directly from your bank account. Interest, currently at 3 percent, will still be charged and the failure-to-pay penalty discussed above is reduced to one-fourth of a percent per month.
5. Hacked: Don't be surprised when you file close to the deadline if the IRS says you have already filed and a refund has already been paid. Millions of taxpayers are having their identities stolen, which are then used to file, delaying refunds by as much as a year. In such cases, special identification numbers are issued to individuals who have been hacked so that in subsequent years, the IRS can tell it's really you filing the return.
While it is unlikely you can reduce your 2014 tax bill at this point in 2015, you probably can reduce what you owe for 2015 in 2016 if you start to think about it now. How to accomplish this varies with each person's circumstances, but meeting with your tax professional after she or he files your 2014 return to discuss planning is a good start.
Williamson is executive director of the Kogod Tax Center at the Kogod School of Business at American University.