Year End Tax Tips

Financial moves to consider to get your tax bill just right

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When it comes to tax planning at the end of the year, you have at your disposal a wide variety of tactics to make sure your tax bill for 2015 is just right.

Figuring out which tactics make sense for your situation requires analyzing your current finances, estimating your tax situation for 2015 and for 2016, identifying financial transactions that could take place either this year or next year, and then figuring out if there are advantages to performing the transaction in one year or the other.

Analyzing current finances

  • Tally up your income, expenses, and savings for the year to date.
  • Estimate what your income, expenses and savings will be for the rest of 2015.
  • Estimate what your income, expenses and savings will be for 2016.
  • Identify any income, expenses or savings that could take place either in 2015 or 2016.

 

Tools for estimating taxes for 2015
ApplicationNotesiOSAndroidWeb
Tax Calculator by TaxSlayer.Nice app, but could not find where to input capital gains income. Free.iOS appAndroid appWeb app
TaxCaster by Intuit.The detailed input is hidden: click the grey arrow (>) on the right-hand side of the screen to reveal it. Free.iOS appAndroid appWeb app
TaxMode by Sawhney Systems.Thorough; supports simple or "full" data input. Free trial.iOS appAndroid appWeb site

 

What we are looking for:

  • What's your marginal tax bracket for 2015? For 2016? Is one year less than the other? If so, consider shifting income to the lower-tax-rate year and deductions to the higher-tax-rate year.
  • What's your adjusted gross income (AGI) for 2015? For 2016? Is your AGI approaching the phase-out limits for any deductions or credits? If so, consider ways to shift income or boost adjustments to income in order to keep your AGI within your desired target.
  • Are there tax breaks you can take in 2015 that won't be around in 2016? If so, perhaps it's better to do that now before the end of the year. See the list of expiring provisions.

    Identifying financial transactions that could take place either this year or next year

    Examples:

    • Charity donations
    • Selling stocks, bonds and other investments
    • Roth conversions
    • 401k and IRA distributions
    • Paying state estimated tax, property tax,
    • Adjusting contributions to a 401k or similar retirement plan

    Make note of any tax advantages to conducting the transaction in one year or the other when running through your calculations.

    Specific Year-End Tax Moves to Consider

    1. How to handle Income for year-end

     

    Type of incomeLowering incomeIncreasing income
    Wages- Boost pre-tax contributions to 401(k) or similar retirement plan
    - Ask if a year-end bonus can be paid out next year instead
    - Hold off exercising incentive stock options

    + Work overtime, ask for a raise, reduce pre-tax retirement contributions, shift retirement contributions to after-tax Roth 401(k) or Roth 403(b).

    + Exercise incentive stock options.

    Business income- Spend on tax-deductible expenses such as equipment and supplies
    - Make payroll tax deposits this year instead of by the January 15th deadline to deduct Q4 payroll tax this year
    - Hold off sending out invoices and collecting on accounts receivable until next year
    - Business losses can offset other income
    - Section 179
    - Review retirement plan needs. Set up solo 401(k) before end of the year if desired.
    + Send out invoices and collect on outstanding accounts receivable
    + Wait to spend money on business expenses until January
    Capital gains & losses- Use installment sales or like-kind exchanges to defer gains to a future year
    • Be aware of where the 39.6% tax bracket begins. LT gains that fall within this bracket are taxed at 20% instead of 15% and may be subject to the 3.8% net investment income surtax.
    - "Loss harvesting": Sell off positions with unrealized losses to reduce taxable gains.
    - Be careful about repurchasing investments sold at a loss within 30 days, as this creates a wash sale.
    - Hold off selling profitable positions until next year.
    - Ensure that carryover losses apply to ST gains when possible.
    Rebalance portfolio across tax-types for tax efficiency

    + "Gain Harvesting": Sell any long-term gains to fill up taxable income to the top of the 15% bracket. Such gains will be taxed at zero percent.
    + Sell any long-term gains to full up taxable income to the top of the 35% bracket. Such gains will be taxed at 15%.

    Retirement distributionsIf you need to take out a substantial amount from a retirement plan, figure out if it's better to take the money this year versus next year. Or perhaps spread out the tax impact by taking out some this year and some next year.

    + Take required minimum distributions (RMD) by the end of the year.

    + If you turned 70.5 years old in 2015, your first RMD must be taken by April 1, 2016. Figure out if it's more advantageous to take the RMD this year or to take two RMDs next year (your first and second).

    Convert pretax IRA to after-tax Roth IRA Increases taxable income in the year of conversion.
    Can "undo" a conversion by April 15/Oct 15.
    Makes sense if the tax cost is low enough compared to expected future tax cost
    Social Security benefits Earning more income can cause more of your benefits to be taxable
    Passive losses from rentals and businesses- Figure out if your passive losses will be limited or deductible this year.  If so, passive losses offset other income. If not, the losses roll forward.+ Consider increasing your passive income to use up your loss carryovers.
    Net Operating LossCarryback/carryforward options to offset income in other yearsOr increase income to absorb the losses. This makes the additional income tax-free (to the extent of the loss).

     

    2. How to handle Expenses at the end of the year

     

    Type of ExpenseAccelerating ExpensesDeferring Expenses
    College tuitionPay for classes starting within the first three months of 2016 to get the expense counted this year. Only do this if you need additional tuition expense to max out the AOTC or LLC credits or the tuition deduction.Hold off paying for tuition until next year if the expense will produce a larger tax credit on your 2016 tax return.
    Itemized deductions
    • Figure out if you can itemize this year and/or next year
    • By comparing itemized deductions versus standard deduction
    • If you are close to itemizing, but your expenses are just less than the standard deduction, consider if boosting any of the itemized deductions will make sense for your situation.
    • For example, you can itemize one year and take the standard the other year. So you might want to boost your deductions in one year. This tactic is called "bunching."
    If it makes more sense to itemize next year (instead of this year), then identify any expenses that can be moved to 2016.
    Medical, dental, healthcare
    • Only expenses in excess of 10% of AGI are deductible.
    • If you're close (but under) the 10% of AGI threshold, consider paying additional medical expenses to get your deduction over the threshold. This way, at least you'll get some deduction rather than none.
    • If you're over the threshold, additional medical spending will be deductible.
    If you'll have significant medical expenses in 2016, consider if you can pay any of your medical bills next year instead. By "bunching" your medical expenses into one year, maybe you can get over the 10% of AGI threshold.
    State estimated taxes
    • Pay your state estimates by the end of the year to deduct it this year.
    • This only works if you are or will be able to itemize AND you're not in AMT
    Hold off paying your Q4 state estimates until January if it will be more advantages to deduct it on your 2016 return.
    Property tax
    • Pay your next property tax installment by end of year to deduct it this year
    • This only works if you are or will be able to itemize AND you're not in AMT
    Pay your next property tax installment in 2016 to deduct it in 2016.
    Charity
    • Donate cash by December 31 to deduct the donation this year.
    • Donate non-cash goods such as clothes, furniture or vehicles to get a deduction this year.
    • Want to donate, but not sure of which charity to send the money to? Consider a Donor Advised Fund
    Postpone donations until next year if the deduction will produce bigger tax savings in 2016. Be aware of the limitations. Pick the right year so the charity generates the most tax savings.

     

    3. What to do about Saving Money at the end of the year

     

    401(k) or 403(b) retirement plans
    • Contributions for 2015 must be made by December 31.
    • Decide how much you want to set aside from each paycheck so that you're ready to go in January for 2016 contributions.
    • Decide how much to allocate to pre-tax traditional and/or after-tax Roth accounts for 2016.
    Traditional IRA
    • Contributions for tax year 2015 due by April 18, 2016.
    • So topping off your IRA can wait until next year if you want to.
    • Determine if how much (if any) of your traditional IRA contributions will be tax-deductible.
    • Contributions for tax year 2016 are due by April 17, 2017.
    Roth IRA
    • Contributions for tax year 2015 due by April 18, 2016.
    • Determine how much (if any) you are eligible to contribute to a Roth IRA.
    • "For kids making minimum wages, they got the ability to do a Roth IRA," observes Frank St Onge, EA. In this situation, Frank suggests that "parents to contribute to the Roth IRA for them and let the kids keep the money."
    • Consider funding a Roth IRA and taking the Saver's Credit (if eligible)
    • Contributions for tax year 2016 due by April 17, 2017.

     

    4. What's New or Different for Tax Year 2015

    • One Indirect Rollover Per Year Rule. In a change from previous guidance, the IRS is now saying that individuals are allowed one indirect rollover per year, period. Previously, the IRS allowed one rollover per year per IRA account. The IRS now believes that the rule means taxpayers are allowed one indirect rollover per year, without regard to how many IRA accounts they have.

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