As 2015 quickly comes to a close, now is the time to sit down and consider year end tax tips and saving strategies that you might implement in order to reduce your April 15 tax bill.
End of Year Tax Saving Strategy #1:
Tax Loss Harvesting. The stock market is relatively flat for the year but most investors will find both winners and losers within their investments. Take a moment before year-end to review your portfolio for rebalancing realizing that up to $3,000 of realized losses in excess of realized gains can be deducted against ordinary income taxes.
End of Year Tax Tip #1:
If you are married, filing jointly, and your taxable income is less than $74,901 ($37,451 for single filers), your tax rate on long-term capital gains is 0%. Use this as an opportunity to eliminate the tax on gains on appreciated stocks. If you like the stock, wait 31 days and repurchase it thus establishing a higher cost basis.
End of Year Tax Saving Strategy #2
Charitable gifts. Another way to reduce your income taxes is to make gifts to qualified charities. This can be in the form of cash, securities or personal items. If you’re thinking of gifting securities, it’s generally best to give appreciated securities instead of cash since you are giving away the ‘tax problem’ associated with the appreciated stock. If you still want to own the stock you can repurchase it immediately using your cash…meaning no thirty-one day waiting period applies. If you’re interested in the charitable tax deduction but have not decided on the specific charities, consider setting up a Donor Advised Fund (DAF). This guarantees you’ll receive the full deduction this year but allow you to dole your gifts out over the next several months or years. For more information about your local DAF, contact:
- In Birmingham: Community Foundation of Greater Birmingham (205) 327-3800.
- In Huntsville: Community Foundation of Huntsville/Madison County (256) 535-2065.
- In Mobile: Community Foundation of South Alabama (251) 438-5591.
End of Year Tax Tip #2:
Note that to receive a full deduction this year, gifts of cash cannot exceed 50% of adjusted gross income while the limitation on appreciated assets, such as stocks, is thirty percent.
End of Year Tax Saving Strategy #3
Retirement plan contributions. If you have not maxed out your contributions to your company 401-k you can use the remaining paydays to increase your investment and income tax deduction at the same time. You’ll need to contact your human resources department for their assistance in adjusting your payroll deduction. This year you can contribute up to $18,000 to your 401k or similar plan. If you are age 50 or older this year, you can contribute an additional $6,000 for a total of $24,000.
End of Year Tax Tip #3:
At a minimum, calculate and capture your company’s matching contribution!
End of Year Tax Saving Strategy #4
Roth Conversion. If for some reason your tax rate will be low for this year, consider converting all or a portion of your IRA to a Roth IRA. When you convert a traditional deductible IRA to a Roth IRA, you create ordinary income.
End of Year Tax Tip #4:
If it turns out not to be a good deal, you are allowed to ‘reverse’ the conversion any time before filing your 2015 tax return including extensions (potentially as late as October 15th, 2016). That gives you about ten months from now to determine if it was a good deal.
End of Year Tax Tip #5:
“Properly aligning your Medicare medical and prescription coverage can save you hundreds, if not thousands of dollars,” says Kimberly Reynolds, CFP® of The Welch Group. Visit www.Medicare.gov for more information about the various plan choices.
End of Year Tax Saving Strategy #5
Get a State Income Tax Credit and Give a Scholarship. You may be aware of the benefits under the Alabama Accountability Act but I’ll bet you didn’t know they raised the limits for individual tax credits. In past years, you could receive up to a $7,500 State of Alabama income tax credit if you also gave a like amount to a qualified Scholarship Granting Organization (SGO). For 2015, they have raised the tax credit amount to $50,000! By choosing to do this you are redirecting a portion of your tax dollars directly to scholarships that allow children of low income families to transfer from failing public schools to non-failing public schools or qualified private schools. The tax credit is limited to one-half of your tax liability. For example, if your Alabama tax liability is $10,000, you could give up to $5,000 to a SGO and receive a dollar-for-dollar tax credit of $5,000. For more information and an easy step-by-step guide visit www.alabamakids.net.
End of Year Tax Saving Strategy #6
Review your tax withholding. In an effort to avoid making Uncle Sam a ‘tax-free loan’ many taxpayers minimize income tax withholding only to find they owe an under-withholding penalty at tax filing time. Check your status now and, if necessary, increase withholding for the balance of the year. Also, if you pay your taxes quarterly, you run the risk of underpayments. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
End of Year Tax Saving Strategy #7
Income and expense shifting. Review your income and expenses and, to the extent possible, shift them between this year and next in order to maximize your tax benefits. For example, if you expect your tax rates to be lower next year pay your January 2016 mortgage payment in December of this year giving you an ‘extra’ interest deduction. Where possible, business owners should pay early 2016 expenses before year end. While state income taxes are not due until January 15, 2016, paying them in December will get you a federal tax deduction in 2015. Also, if possible, postpone year-end bonuses until early January. Finally, consider making some of your 2016 charitable contributions before year-end. If you expect to be in a higher tax bracket next year, do the opposite.
End of Year Tax Saving Strategy #8
Make Gifts: If you have assets that you want to gift to family members then you are allowed to give up to $14,000 ($28,000 for couples) to as many people as you wish without paying gift taxes. This reduces your estate for estate tax purposes and shifts future income and appreciation to the family member who may be in a lower tax bracket.
End of Year Tax Tip #6
Instead of you selling highly appreciated stock and giving a cash gift to your children, give your children the stock and have them sell it. If they are married, filing a joint tax return and their taxable income is less than $74,901 ($37,451 for single filers) the tax on the long-term gain is zero. If you love the stock, use your cash to buy shares to replace the gifted shares in your personal account.
- Caution: Beware of the ‘kiddie tax’ for dependent children.
End of Year Tax Saving Strategy #9
Make Loans: Consider making loans to family members. The Applicable Federal Rate (AFR) is very low right now. You can make loans to children to help them buy a home, start a business or invest in assets with a higher potential return than the required interest rate charged. For December, the rates are as follows:
- Short-Term (under 3 year term) 0.56% annually
- Mid-Term (3 years to less than 9 years) 1.68% annually
- Long-Term (9 years or longer) 2.61% annually
End of Year Tax Tip #7
We believe the Federal Reserve will begin raising rates soon, so now is the perfect time to implement this strategy.
End of Year Tax Saving Strategy #10
Avoid buying mutual funds at year-end in taxable accounts. You can end up with a nasty tax surprise since all mutual funds must declare 90% of their gains before year-end. You could end up invested for a short time, have no gains but get hit with a taxable distribution.
Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year.