7 year-end tax tips for Individuals

Tax form being filled out.  1040, advisor, april, balance, bill, budget, business, confusion, deductions, document, filing, finance, financial, form, government, horizontal, income, nobody, number, paper, paperwork, pen, refund, tax, taxes, wages.  Shutterstock 65341252

The holiday season is upon us and tax planning is probably the furthest thing from your mind. For many taxpayers, more time and effort was put into their Cyber-Monday shopping strategy than year-end planning. It is important to remember that the most effective tax planning is usually done before the tax year is over – and that time is now.

In fact, Lee Boss, CPA with The Mercadien Group in Princeton notes “Many tax planning strategies must be implemented prior to the end of the tax year (December 31st) in order to receive benefit for the year, so December provides a last chance opportunity to review your current tax situation with your CPA and/or other advisors in order to put into motion various tax planning strategies.”  Consider reviewing the following opportunities before 2015 comes to an end.

Boost retirement plan contributions

One of the most effective ways to reduce your taxes is to simply reduce your taxable income. For 2015, taxpayers can save up to $18,000 (up from $17,500 for 2014) in their 401(k) plan and those over the age of 50 can add another $6,000 (up from $5,500 for 2014) for a total of up to $24,000. While pre-tax contributions will reduce taxable income for 2015, after-tax Roth 401(k) contributions may be more advantageous depending on your circumstances. Be sure to determine whether you would benefit more from pre-tax or after-tax contributions. Unlike an IRA account, 401(k)s generally must be funded by December 31.

Since maximum contribution amounts have increased for 2015, many taxpayers also forget to adjust their contribution level up to reflect the new limits. Consider reviewing your year-to-date contributions and make any last minute adjustments to ensure that you are able to accomplish your savings goals for this year.

Double-check required minimum distributions

When most retirement account holders reach age 70 ½, the IRS requires that Required Minimum Distributions (RMDs) are withdrawn by December 31 of that year. There is some additional flexibility the first year distributions are taken as the first payment can be delayed until April 1 of the year following the year in which you turn age 70½. While this approach will result in two RMDs being withdrawn in one year, it can be especially useful for taxpayers expecting to be in a significantly lower tax bracket the year after they turn age 70 1/2.

Be sure to carefully review RMDs for inherited IRA accounts as they are often missed by beneficiaries. So what happens if you fail to take an RMD?

Unfortunately, the IRS levies a harsh 50 percent penalty on the amount of the RMD that should have been taken so be extra careful to double-check that distributions are correct. If you miss your RMD consider filing Form 5329, with your federal tax return for the year in which the full amount of the RMD was not taken.

It may be possible to waive the penalty if you can substantiate that the shortfall was due to reasonable error so consider reviewing Publication 590-B for additional information.

Review tax withholdings

Underpayment penalties are another common, yet avoidable issue that often trips up taxpayers. Failing to properly withhold and pay estimated taxes can lead to significant unintended penalties that can really add up. Simply reviewing your income and estimated tax throughout the year with your tax professional may help ensure that you are properly withholding.

Depending on your circumstances, estimated payments of 110 percent of the prior year tax liability may be necessary to avoid underpayment penalties. Consider reviewing Publication 505, Tax Withholding and Estimated Tax, for more information.

Donate to charity – especially appreciated assets

Financially supporting the charity of your choice can also be an effective way of reducing your overall tax liability as it too helps reduce your taxable income. There are a few things to remember in order to properly claim the deduction. You must file form 1040, itemize your deductions and donate to a qualified charity in order benefit claim the deduction.

Donated cash or property of $250 or more require a written statement from the organization with a description of the donation amount. Maintaining detailed records that substantiate the contributions being made is must. For donations of noncash gifts greater than $500, file Form 8283 - Noncash Charitable Contributions.

For taxpayers subjective to higher capitals gains rates, donating appreciated stock held for greater than one year can be great way of maximizing a charitable deduction while sidestepping capitals gains taxes. But be careful, donating appreciated assets held for less than one year may result in your deduction being limited to the original cost or investment.

Tax gain/loss harvesting

Many taxpayers are familiar with the strategy of tax-loss harvesting – selling investments within a taxable account that have declined in value in order to capture a tax loss. This approach allows for up to $3,000 per year in losses to be written off against ordinary income with excess losses carried forward to offset future gains. Keep in mind that IRS wash sale rules may apply, preventing you from claiming a loss if you buy a substantially identical investment within 30 days of the sale.

Another overlooked opportunity is tax-gain harvesting. If you identify that your taxable income is $73,800 or less for those married filing jointly or $36,900 or less if filing single, you may be eligible for the zero percent long-term capital gain rate for assets held greater than one year. This may be especially useful if you find that your income has suddenly dropped in a given year.

Accelerate deductions

Depending on your tax situation, accelerating certain payments so they take place in 2015 can be another approach to reducing tax liability. From an estimated state income tax bill that is due January 15 to a hospital or property tax bill due early next year, paying deductible expenses prior to year-end can also add up. However, be careful - accelerating deductions could end up subjecting you to the alternative minimum tax so speak to your tax adviser before bunching up your tax deductions.

Empty FSA accounts

Flexible spending accounts (FSAs) allow employees allocate a portion of their compensation into an account that can then accessed to pay everything from child care to medical bills. While the contributions to an FSA are tax advantaged – avoiding both income and Social Security taxes, unused funds that remain in the plan at year-end could be forfeited. Consider reviewing your balance and speak to your administrator to see if your plan allows for a grace period which pushes the deadline to March 15 of next year.

The best tax planning is pro-active rather than reactive. Since everyone’s situation is unique, consider speaking to your financial and tax advisers to determine the most appropriate tax strategies for you.

Kurt J. Rossi, MBA is a Certified Financial Planner Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.Independentwm.com and www.bringyourfinancestolife.com  - LPL Financial Member FINRA/SIPC.