There Is Still Time: Year-End Tax Planning Strategies

Although the days are waning for 2015, there is still time to get your act together for a more cheerful result of your tax situation this year.  Although this week and next will be consumed with festivities, there are still several business days to make the following moves:

  • If you are over 70 1/2 years old and have non-ROTH IRA’s, you still have until December 31 to make required minimum distributions.  Remember, make your planner aware of all outstanding relevant retirement funds.  The RMD calculation will take all of those Traditional and Rollover IRA’s into consideration.
  • Make a donation to a qualified charity to get a potential deduction on your taxes.  Even if you pay by check, as long as it is dated and mailed in 2015, it will count.  Also, donations made by credit card, even if you don’t pay the bill by next Christmas, counts as a deduction.  The government is still allowing some RMD distributions that are donated to charity to avoid income tax.
  • Some of your taxable investments might be down in value versus your cost.  Sell them, buy an ETF that follows that asset class closely, and buy back that investment 31 days later (can be in 2016) to avoid wash-sale rules.  Taking a taxable loss is not admitting defeat.  It is the smart thing to do tax-wise.  $3K of those losses offset regular income.  The rest can be carried forward to offset gains in future years.
  • Give the gift of college.  Your grandchildren have every video game you can imagine.  However, college costs will probably eclipse $150K by the time they arrive on campus.  Consider giving up to $14K to a section 529 plan in their name.  The limitations are not per beneficiary, as in a Coverdell account.  For a Coverdell, contributions are limited to $2K each year for each beneficiary.  Distributions from 529 plans are tax-free if used towards qualifying educational expenses.  The gifts also lower your taxable estate.
  • Pay 4th Quarter estimated state taxes early.  Taxpayers who itemize may deduct any state income taxes paid during 2015.   However, this strategy may not benefit taxpayers subject to the AMT tax.
  • Watch out for that 3.8% net income investment tax.  This applies to the lesser of (1) net investment income or (2) the amount by which the modified adjusted gross income exceeds certain thresholds ($250K for joint filers or surviving spouses, $125K for those married and filing separately, and $200K for single and head-of-household filers).  Planning strategies to reduce this tax include increasing contributions to retirement savings plans, transforming passive business activities into active business activities, deferring capital gains through the use of installment sales, and eliminating capital gains with offsetting capital losses.
  • Back-door ROTH contributions.  If you aren’t eligible to make contributions to a ROTH IRA due to high income, contribute to a non-deductible IRA, and convert the account to a ROTH by year end.
  • If you converted assets in a traditional IRA to a ROTH earlier in the year, and the assets in the ROTH IRA have gone down in value, you may end up paying a higher tax than necessary.  You can convert the original amount (plus earnings, or minus losses) from the ROTH IRA back to the Traditional IRA via a trustee-to-trustee transfer.  You can later reconvert to a ROTH IRA.

For more year-end tax tips and strategies, contact me today for a free consultation and evaluation of your investments.

Brian T. Eddy, MBA, CFA, CFP(R)