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.
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
Selling stocks, bonds and other investments
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 income||Lowering income||Increasing 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.
|Retirement distributions||If 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 Loss||Carryback/carryforward options to offset income in other years||Or 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 Expense||Accelerating Expenses||Deferring Expenses|
|College tuition||Pay 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|| ||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|| ||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|| ||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 in 2016 to deduct it in 2016.|
|Charity|| ||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|| |
|Traditional IRA|| |
|Roth IRA|| |
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.