As year-end approaches, I would like to encourage you to consider some tax-smart strategies and take action if needed before the year ends. April 15 is the due date to pay taxes, but to ensure that you pay the Internal Revenue Service and your State the least possible amount on that date, you may need to make some tax moves before the tax year ends, meaning before December 31st.
Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.
Here are some to get you started:
Defer your income
Consider deferring your income to next year, if it is expected to be similar or lower in income than current year. Hold your bonus until January. Put more money into your 401K. Hold off on selling assets that will produce a capital gain. If you're self-employed, don't send out invoices for year-end jobs until early next year.
Add to your Employer 401(k), IRA, SEP or Solo 401K ; Consider Roth Conversion
Even if you're nowhere near the top tax bracket, putting as much money as you can into your company's 401(k) is a good idea and, the sooner you put the money into the account, the longer the earnings will grow tax-deferred. The maximum is $18,000. If you are age 50 or older, you can put in an extra $6,000. With an IRA, you have until April 15, 2016, to make a 2015 tax-deductible contribution of up to $5,500 ($6,500 if you’re age 50 or older).
Consider a Roth IRA conversion – Income limits may not allow a contribution to a Roth IRA, but anyone can do a Roth Conversion by converting eligible funds from a Traditional IRA or employer-sponsored retirement plan to Roth IRA. While the amount of Roth IRA Conversion is taxable in the year of converting – it could make a potentially significant future wealth and wealth transfer more tax efficient, to taxpayers who have potentially taxable estates and to taxpayer that are at a significantly lower tax rate this year.
Review your FSA amounts
Medical and/or Dependent Daycare flexible spending account, or FSA, also requires year-end attention so you don't waste it. The U.S. Treasury announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, but your company has to take steps to adopt it.
Make sure you have adequate health insurance coverage
If you and your family don’t have adequate medical coverage (referred to as minimum essential coverage), you may be subject to a penalty. Medical insurance provided by your employer or through an individual plan purchased through a state insurance marketplace generally qualifies for adequate coverage. The penalty amount varies based on the number of uninsured members of your household and your household income. If you have three or more uninsured household members, the penalty may be $975 or more for 2015 ($2,085 or more for 2016), depending on your household income.
Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years. Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax.
Make the most of your home
Homeownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year's tax bill. Consider making your January mortgage payment by Dec. 31 and deduct the mortgage interest on your current year’s tax return. The same may be true for early property tax payments (AMT is a factor to consider).
Estimate your net Rental Property activity
If you have a rental property, whether in the US or abroad, estimate your Net Taxable Income or Loss after depreciation. Remember that the principal portion of a mortgage payment is not an expense. Based on the outcome – consider the timing of required expenses and/or rent income.
Bunch your deductible expenses
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount. Medical and dental expenses, for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses, which include business expense claims, must be more than 2 percent of AGI. Consider making higher State estimated tax payment before December 31st to increase your Federal deduction for current year and get your overpayment from the state as refund in early next year. It will be taxable next year, but you may be in a lower tax bracket next year (AMT can be a factor so planning is advisable).
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process, the better. It's much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.
Be generous to charities
Charitable gifts can help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities. Many groups will accept vehicles, with some even making arrangements to pick them up.
Donate stock or mutual funds that you've held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset's value at the time of gifting. Even better, you don't have to worry about capital gains taxes on the appreciation of your gift.
Pay college costs early
The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return and reduce your tax bill if you are not over the threshold.
Use your annual gift tax exemption.
An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate and help reduce or avoid federal gift and estate taxes. This may include cash, stocks, bonds, and portions of real estate. However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information.
Stay on top of your withholding & estimated tax payments
If you expect to be subject to an underpayment penalty for failure to pay your 2015 tax liability on a timely basis, consider increasing your withholding between now and the end of the year to reduce or eliminate the penalty. Increasing your final estimated tax deposit due Jan. 15, 2016, may reduce the amount of the penalty but is unlikely to eliminate it entirely. Withholding, even if done on the last day of the tax year, is deemed withheld ratably throughout the tax year. Underpayment penalties can be avoided when total withholdings and estimated tax payments exceed the prior year tax liability (in the case of higher-income taxpayers, 110 percent of the prior year’s tax) OR at least 90 percent of the tax for the current year, whichever is smaller.
If you have any questions or need an advice, please schedule a complimentary 15 minutes phone call with me.