Tax-Planning Tips for Individuals as Year-End Approaches
IMGCAP(1)]As 2015 comes to a close, taxpayers are once again facing uncertainty as Congress has yet to act on a host of important provisions that expired at the end of 2014.
Although these temporary tax provisions have been routinely extended for years, the possibility that Congress could let them remain expired or only extend a select number of them leaves taxpayers and their advisors in limbo as to how to properly plan. Still, there are many actions that can be taken to save tax dollars this year, even amidst the uncertain fate of extender legislation.
For individuals, the tax breaks that expired at the end of 2014 include:
• The option to deduct state and local sales and use taxes instead of state and local income taxes.
• The above-the-line deduction for qualified higher education expenses.
• Tax-free IRA distributions for charitable purposes by those age 70-1/2 or older.
• The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
Some or all of these expired provisions may be retroactively reinstated, thereby opening up some truly last-minute year-end tax-planning opportunities, but as of yet, there’s no way of knowing if that will take place.
[IMGCAP(2)]Actions You Can Take Now
Based on the current tax rules, the actions below may help taxpayers save tax dollars if they act before year-end. Not all the actions will apply in every taxpayer’s particular situation, but individuals will likely benefit from many of them.
1. Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding and then buy back the same securities at least 31 days later.
2. Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits and other tax breaks for 2015 that are phased out over varying levels of AGI.
3. Consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if you are eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.
4. Re-characterize the conversion of a traditional IRA to a Roth IRA. If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by re-characterizing the conversion—that is, 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. You can later reconvert to a Roth IRA.
5. Ask your employer to defer your 2015 bonus until 2016.
6. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
7. Ask your employer to increase withholding of state and local taxes before year-end. If you expect to owe state and local income taxes when you file your 2015 return, and you won’t be subject to alternative minimum tax in 2015, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015.
8. Take an eligible rollover distribution from a qualified retirement plan before the end of 2015. if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem, then roll over the gross amount of the distribution. The amount that was withheld from the initial distribution will increase your withholding and lessen or eliminate the penalty.
9. Consider whether it is possible that you may be liable for the AMT for 2015, and if it is possible, estimate the effect of any year-end planning moves on the AMT for 2015. For example, keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deductions for state property taxes on your residence and for state income taxes, miscellaneous itemized deductions and personal exemption deductions.
10. Apply a “bunching” strategy. You may be able to save taxes by bunching certain types of your 2015 and 2016 expenses into 2015. Those expenses are those that generate miscellaneous itemized deductions subject to a 2 percent of AGI floor, medical expenses and itemized deductions as a whole.
11. Pay contested taxes. If you do, you’ll be able to deduct them this year while continuing to contest them next year.
12. Settle an insurance or damage claim. This could maximize your casualty loss deduction this year.
13. Take required minimum distributions from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016 — the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
14. Increase the amount you set aside for next year in your employer’s health flexible spending account, or FSA, if you set aside too little for this year.
15. Make yourself eligible to make health savings account contributions by Dec. 1, 2015. If you can, you’ll be able to make a full year’s worth of deductible HSA contributions for 2015.
16. Shelter gifts using the annual gift tax exclusion before the end of the year to save 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 can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
As always, year-end tax planning doesn’t occur in a vacuum. It must take into account each taxpayer’s particular situation and planning goals with the aim of legally minimizing taxes to the greatest extent possible. While many taxpayers will come out ahead by following the traditional approach of deferring income and accelerating expenses, all taxpayers need to consider whether that approach applies to them.
Thomas Long, Catherine Murray and Jeffrey Pretsfelder write for Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.