There’s no time like the present to strategize about taxes. Thoughtful tax planning today can help you save significantly come tax time. And who doesn’t want to keep as many of their hard-earned dollars as possible!
Before Year-End: Consider These Options.
You can employ many strategies to minimize your taxes. Every year you need to explore which options apply to your particular situation. Here are a few things worth considering:
Compare 2015 to 2016. If your taxes will be lower in 2015 than 2016, then you may want to postpone tax savings strategies until next year. However, if your taxes will likely be lower in 2016, accelerating tax savings strategies into this year might make “cents.” For example, if you’re retiring in 2016 and income will be lower, consider doubling your charitable gifts this year and cutting back next year. The charities will receive the same gift amount, but you might gain a bigger tax deduction in 2015. Accelerating other tax deductions into 2015 will potentially have the same effect.
Required minimum distributions (RMDs). If you’ll be 70 ½ or older in 2015, you’re required to take minimum distributions from your retirement accounts before year-end. If this is your first year for taking an RMD, you can delay the distribution until April 1st, 2016, which allows the dollars to be taxed in 2016 instead of 2015. However, remember that you will need to take your 2016 RMD by the end of 2016. So, both RMDs would be taxable in 2016.
We don’t know if legislation will be extended that allows you to gift all or part of your RMD to charity and avoid paying taxes on the distribution. If you’d like to send money to a charity from your IRA, you need to contact your IRA custodian to make that transfer for you. If there’s no extension of the provision, you can still deduct the gift on your tax return.
Tax losses. If you have investments with significant losses, selling them before year-end will allow you to offset realized gains and potentially lower your taxable income. Be careful not to buy the same investment within 30 days before or after the sale. A wash sale rule could apply that would forego the tax loss.
Retirement plan contributions. Double-check now to make sure you are contributing the right amount to your 401k or 403b. You still have time to make an adjustment that would pick up the pace of your contributions prior to year-end.
IRA contributions and conversions. You have until April 15th of next year to make a Traditional or Roth IRA contribution. However, conversions to Roth IRAs must be done before year-end to qualify for 2015.
There are other areas of tax planning that can be just as beneficial as these suggestions. Please contact us for more conversation.