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My wife and I have an annual combined income of $258K. Also, this year I ended up selling quite a bit of my ESPP and RSUs which incurs both long term and short term capital gains.

Long term capital gains = $8K Short term capital gains = $7K

Since its December, I am looking to see if there is any actions I can take at this time to offset and reduce my taxable income. Here are a few things which we have done:

  • Maxed out my 401k. Wife's 401k is around 60%.
  • Tax harvesting - Sold off stocks and ETFs which were well below purchase price to offset some of the capital gains.
  • Charitable contributions - close to $500 for the year.

Is there anything else that can be done at this point to reduce the overall taxable income? I guess I will be hit by AMT as well due to the capital gains incurred?

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    If someone grossing $250K isn't donating $10K (or more) who will? Many believe in 10% of one's income. If you can budget that, that's great. The flip side is 5% should be the minimum any 6 figure earner donates. – JoeTaxpayer Dec 2 '15 at 23:00
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    @user662852 I know you're being sarcastic, but that won't work either because rental losses are phased out entirely for incomes above $150k. – Craig W Dec 3 '15 at 14:27
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    The trouble with charitable donations as a way to avoid taxes is that one has to spend that money. For someone in the 33% tax bracket (say) not inclined to be charitable, does it make sense to give $3000 to a charity so as to avoid having to pay $1000 to the IRS? One way, you are "out" a net of $2000, the other just $1000 (and the penalties and interest are not that onerous). (Please note: I am playing devil's advocate here. Personally I am in full agreement with JoeTaxpayer's comment above (and the unsaid implication that the OP's $500 donation (with $255K income) is miserly indeed). – Dilip Sarwate Dec 3 '15 at 17:08
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    It is the tone in which you mention charitable contributions "Here are a few things we have done..... Charitable contributions close to $500 for the year" almost as if to say "Sheeesh! How much more can we be expected to give to charity?" that is disturbing. Don't give them a dime more; just pay the IRS and you will have more money to spend on housing, support for family members, temples in India, and so on. The goal should be not to reduce taxable income but income net of taxes so that you have more to spend on things that you want to spend money on. – Dilip Sarwate Dec 3 '15 at 22:17
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    I'm confuse about why you want to reduce your taxable income in this scenario. It seems like the goal should be to (a) maximize the amount of income that you keep and/or, touching on the charitable donations points, (b) direct the money to where you want it. If you're doing (a) then spending money to get a tax deduction won't achieve the goal. If it's (b) then charitable donations are your answer. You may spend more, but you'll have spent it on a cause that you choose - For some people that would be worth it. – user32479 Dec 4 '15 at 3:40
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Assuming that what you want to do is to counter the capital gains tax on the short term and long term gains, and that doing so will avoid any underpayment penalties, it is relatively simple to do so.

  1. Figure out the tax on the capital gains by determining your tax bracket. Lets say 25% short term and 15% long term or (0.25x7K) + (0.15*8K) or $2950.

  2. If you donate to charities an additional amount of items or money to cover that tax. So taking the numbers in step 1 divide by the marginal tax rate $2950/0.25 or $11,800.

Money is easier to donate because you will be contributing enough value that the IRS may ask for proof of the value, and that proof needs to be gathered either before the donation is given or at the time the donation is given.

Also don't wait until December 31st, if you miss the deadline and the donation is counted for next year, the purpose will have been missed.

Now if the goal is just to avoid the underpayment penalty, you have two other options.

  1. Use the Safe harbor rule.
  2. File an estimated tax.

The safe harbor is the easiest of the two to determine. Look at last years tax form. Look for the amount of tax you paid last year. Not what was withheld, but what you actually paid. If all your withholding this year, is greater than 110% of the total tax from last year, you have reached the safe harbor. There are a few more twists depending on AGI

Special rules for farmers, fishermen, and higher income taxpayers.
If at least two-thirds of your gross income for tax year 2014 or 2015 is from farming or fishing, substitute 662/3% for 90% in (2a) under the General rule, earlier. If your AGI for 2014 was more than $150,000 ($75,000 if your filing status for 2015 is married filing a separate return), substitute 110% for 100% in (2b) under General rule , earlier. See Figure 4-A and Publication 505, chapter 2 for more information.

  • Nice work, much more scholarly then my own. – Pete B. Dec 3 '15 at 13:32
  • Thanks. Would short term/long term losses also cover the capital gain taxes dollar to dollar? e.g. $500 short term loss on investments would directly offset $500 short term capital gain? – vivekian2 Dec 3 '15 at 15:50
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My first question to you is if you itemize? If not the charitable contributions will not do any good. Along these lines, donating unused items to Goodwill or similar can help boost your charitable giving.

The bottom line is that the 401K is one of the few real deductions high earners have. If you anticipate earning similarly next year, you could both contribute the max. You still have some time before the end of the year, can you get more in your wife's account?

Does your state have income tax? You might be able to deduct sales tax for larger purchases if you made any. However, I would not justify a large purchase just to write off the sales tax.

Conventional wisdom will tell you that you should have a large mortgage in order to deduct the interests. However, it does not make sense to pay the bank 10K so you can get 3K back from the government. That seems pretty dumb.

If you did not do additional withholding, you probably will have to pay a significant amount plus penalty if you owe more than $1000. You still have time to make one more quarterly payment, so you may want to do so by January 15th.

For next year I would recommend the following:

  • Estimate your earnings and tax owed and add additional withholding, to minimize the pain
  • Both of you contribute the max to the 401K
  • Give more. $500 at your income level is pretty paltry.

The funny thing about giving is that it rarely helps the recipient, it does so much more for the giver. It helps you build wealth.

For myself I like to give to charities that have a bent to helping people out of poverty or homelessness. We have two excellent ones here in Orlando, FL: Orlando Rescue Mission and Christian Help. Both have significant job training and budgeting programs.

  • yes we itemize, although I generally let Turbo Tax do the math. Itemization tends to give the higher return. Unfortunately no large purchases this year. Also, don't own a home as yet. Would increasing withholdings with 1 month to go make sense? – vivekian2 Dec 2 '15 at 21:45
  • I can definitely increase charity contributions for this year. What do you suggest? Are cash contributions the most effective way to reduce taxes? I am just trying to see what would be a win-win situation for both giver and receiver. – vivekian2 Dec 2 '15 at 21:47
  • If you withheld enough for last year's income, I think you're okay withholding-wise this year without a penalty, no? It would have to have been 100% of last year's income, but still. – Joe Dec 2 '15 at 22:54
  • IIRC, the penalty is based upon the amount owed, so reducing the amount owed is a good thing, so yes increasing withholding can make sense. Cash contributions are less likely to be audited, just make sure you are giving in a way that is tax deductible to a reputable charity. For example, when sponsoring a family for Christmas, although the organizing charity might be legitimate, it will probably not be tax deductible as you are giving directly to the family. It would be better to write the organizing charity a check. – Pete B. Dec 3 '15 at 13:36
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    @vivekian2 Increasing withhold will pay the tax sooner - which might be important if you're underpaid to the point of the penalty. (But see the comments by Joe and myself about exceptions to the penalty that might apply in your case.) It won't reduce your taxable income or reduce your total tax paid since it is a tax payment! – user32479 Dec 4 '15 at 3:42
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Depending on the size of the donation, you may be able to reduce taxes further by donating appreciated assets, such as stock or fund shares that have gone up a lot. That lets you dodge the capital gains tax on redeeming the shares, and if you're donating to a tax-exempt organization they don't have to pay that tax either.

And as @JoeTaxpayer has confirmed, you still get to deduct the current value of the donation, not just the basis value of those shares. So if you're donating anyway, this comes close to being Free Money in exchange for some slightly annoying paperwork. (Yet another benefit of long-term investing!)

Of course folks in the top brackets sometimes set up their own tax-exempt foundations so they can decouple taking the tax break from deciding what to do with the donation.

  • Yes, current value is the deduction for appreciated stock. So in a good year, 10K in donated stock gives a $2800 tax savings (for example) as well as avoiding $1000 or so in long term gain tax on low basis stock. A great way to make your donation money got further. – JoeTaxpayer Dec 3 '15 at 14:36
  • I appreciate being a usual suspect! A badge of honor for me. Note, there's a bit of tinkering that makes this strategy good for those who are borderline on the standard deduction. You have a year where other deductions put you into itemizing range. That'd when you donate 2-4 years' worth of appreciated stock and take the deduction. In the next few years, you itemize, but are still generous through your charity fund. – JoeTaxpayer Dec 3 '15 at 19:09
  • I itemize most years, so that wouldn't have occurred to me. Tnx again. – keshlam Dec 3 '15 at 20:23

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