Our recent post Year-End Tax Planning: Important as Ever for 2015 highlighted several tax breaks that could be relevant for individuals and businesses as they look toward the end of the year.
In this post, we offer a short list of year-end tax planning tactics that individuals are advised to consider and discuss in more detail with their tax advisors. While these tactics might offer tax minimization opportunities, it is important to remember that not every approach is suitable for everyone and that every taxpayer has a unique set of circumstances to consider.
- Realize losses on stock while still being able to preserve your investment position through one of several approaches. One example of how this could be achieved is by selling an original holding and then purchasing back the same securities after a minimum of 31 days.
- Postpone income until next year while also accelerating deductions into this year, which could facilitate claiming credits, larger deductions, and other 2015 tax breaks. These include child tax credits, higher education tax credits, and deductions for student loan interest. The postponement of income could also be beneficial for a taxpayer who anticipates falling into a lower tax bracket next year. To illustrate the importance of understanding each unique set of circumstances, it could also be beneficial to accelerate income into 2015 if, for example, the taxpayer has a marginal tax rate that is much lower this year than it will be next.
- It could be worth exploring the conversion of traditional-IRA investments into a Roth IRA if eligible for investments in depressed stocks or mutual funds. It is important to remember that a conversion like this would increase the taxpayer’s AGI for 2015.
- If assets from a traditional IRA were converted into a Roth IRA already this year only to decline in value, the taxpayer could end up paying more tax than needed without some action. To address this, consider recharacterizing the conversion by transferring the converted amount (plus earnings or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. It would still be possible to reconvert to a Roth IRA at a later point.
- Some taxpayers might want to explore options with their employers to defer any bonuses until 2016.
- Paying any deductible expenses before the end of 2015 could be worthwhile in order to increase 2015 deductions. This is true even if the credit card bill is not paid until the start of 2016.
- If state and local income taxes are expected next year, it is advisable to explore with an employer whether they would increase withholding of state and local taxes before year-end to bring the deduction of those taxes into 2015 if the taxpayer will not be subject to the alternative minimum tax (AMT) in 2015.
- Take an eligible rollover distribution from a qualified retirement plan before the end of the year if facing a penalty for underpayment of estimated tax. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. The taxpayer can subsequently roll over the gross amount of the distribution. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.
- Estimate the impact of year-end planning strategies like these on the AMT for 2015. Remember that many tax breaks allowed for purposes of calculating regular taxes are not allowed for AMT purposes. Some deductions, including those for medical expenses for someone 65 years old or older as well as a spouse who at least 65, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT this year, these types of deductions should not be accelerated.
- Taxpayers might be able to save in 2015 and 2016 by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
- Consider paying contested taxes in order to deduct them this year while continuing to contest them in 2016.
- Consider settling any insurance or damage claims in order to maximize casualty loss deductions this year.
- Take the required minimum distributions (RMDs) from your IRA or 401(k) plan. RMDs from IRAs need to begin by April 1 of the year following the year the taxpayer reaches age 70.5. This start date applies to company plans, but non-5 percent company owners who continue to work are able to defer RMDs until April 1 following the year they retire. Not taking a required withdrawal might result in a penalty of 50 percent of the amount of the RMD not withdrawn. Be careful when considering delaying 2015 distributions to 2016; bunching income could push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. Nonetheless, it might be beneficial to take both distributions in 2016 if you expect to be in a lower bracket that year.
- Increase what is set aside for next year in an employer’s health flexible spending account (FSA) if not enough was set aside this year.
- If possible to be eligible for making health savings account (HSA) contributions by December 1, 2015, consider making an entire year’s worth of deductible HSA contributions for 2015.
- Make gifts sheltered by the annual gift tax exclusion before year-end to save on gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals.
You might also be interested in reading 2015 Year-End Tax-Planning Tactics for Businesses and Business Owners.
Tim Devlin, CPA, Tax Services