Strategic Wealth Inc.
Start with the Spirit of Giving
Some people may want to lower your tax bill by accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the timing. You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash. Better yet, as long as you've owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.)
Take some last-minute tax deductions
Other expenses you can accelerate include an estimated state income tax bill due January 15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up deductions could be a blunder if you're subject to the alternative minimum tax, as discussed below.)
Make sure you'll be itemizing for 2015 rather than claiming the standard tax deduction. Unless the total of your qualifying expenses exceeds $6,300 if you are single, or $12,600 if you're married filing a joint return, itemizing would be a mistake.
If you're on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end planning stresses pushing as many deductible expenses as possible into the following year when they'll have more value.
Estimate your household income for Marketplace Insurance.Are you applying for a subsidy or discounted insurance in the Health Insurance Marketplace this open enrollment season? If so, you will have to project your 2016 household income and family size when you apply. Start looking into any changes that may take place in 2016 (growing your family, job promotion, heading into retirement, etc.). These changes may affect the amount of subsidy you are given to help you pay for insurance.
Spend your Flexible Savings Account.
If you have a FSA and you have money left get caught up on your doctor’s visits. The old “Use it or lose it” rule may not still apply, but If you have unused money in your FSA account on December 31st, you may only be able to carry over up to $500 into your 2016 FSA or your plan may limit the amount of time to 2-1/2 months after the end of the plan year to use your funds.
Sell investments losers to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2015 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,000 for 2015, $24,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA. You have until April 15, 2015 to make IRA contributions for 2015, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. Making deductible contributions also reduces your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2015, plus an extra $1,000 if you are 50 or older.
If you are self-employed, the retirement plan of choice is a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline (including extensions) for your 2015 return. The amount you can contribute depends on the type of Keogh plan you choose.
Check IRA distributions
You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 1/2. Failing to take out enough triggers one of the most draconian of all IRS penalties: A 50 percent excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. After that, annual withdrawals must be made by December 31 to avoid the penalty.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.