AS THE END OF THE YEAR draws near, now is the time to consider taking actions that might minimize your 2015 taxes. You can also talk with your tax advisor about the best strategies to meet your financial and charitable giving goals while possibly saving on taxes. Accountant Vinay Navani, of Wilkin & Guttenplan P.C., suggests these end-of-year tax tips to help guide your conversations.
1. Max out your 401(k)
Any contributions you make to an employer's 401(k) plan have to be made within this calendar year, unlike contributions to a traditional IRA or a Roth IRA, which generally can be made by April 15 and still count as the previous year's contribution. So check with your employer to see if your plan allows you to ramp up your before-tax salary deferrals now to reach the $18,000 contribution limit for 2015. And if you will be 50 or older at any time in 2015, see if you can put away another $6,000—the catch-up amount allowed for older workers—before the end of the year.
2. Convert a Traditional IRA to a Roth IRA
When you convert some or all of a traditional IRA to a Roth IRA, the amount you convert will be treated as a distribution and generally taxed as regular income. (It could even push you into a higher tax bracket.) But if you think a conversion makes sense for you, it can be used strategically. For instance, you may want to consider a conversion if the value of your traditional IRA has dropped significantly—fewer assets to hike your income—or if you have less taxable income this year, perhaps due to a large charitable gift. You can limit your tax liability by converting only a portion of your traditional IRA. However, Navani warns, "make sure you have the cash to pay the conversion tax bill." If you have more than one traditional IRA, keep in mind that any conversion will be deemed to be made from all of the IRAs on a proportionate basis.
3. Make 529 college savings plan contributions or cash gifts to family
You can make gifts of up to $14,000 this year—married couples can elect to give twice that amount—to as many individuals as you choose without triggering a federal gift tax or reducing your unified estate and gift tax credit. You and your spouse could, for example, use your annual gift tax exclusion to jointly contribute $28,000 to each of your children's (or grandchildren's) 529 College Savings Plans. Or, you could take advantage of a special 529 Plan rule that allows you to contribute up to five years of annual exclusion gifts ($70,000 or $140,000 for married couples electing to gift split) at once for each designated beneficiary, as long as you don't make future contributions to that beneficiary during the same five year period. Such contributions are treated as having been made "ratably" – that is, as if they were contributed in equal amounts of $14,000 (or $28,000 for married couples electing to gift split) annually for five years, instead of all at once – for federal gift tax purposes. However, if you die before the five-year period elapses, a portion of the contribution will be included in your estate. In addition, some states offer state tax breaks for certain 529 plans.
A charitable donation of stocks that have appreciated could give you a double tax benefit.
4. Donate to charity
If you've been planning to make a large charitable gift soon and have had an exceptional income year—say you've sold a business or are on track for an outsize bonus—you may want to consider making that donation before the end of the year to minimize taxes on that extra income. A donor advised fund (DAF) allows you to make a contribution to a public charitable fund, get an immediate income tax deduction for the contribution, and then disburse those assets to the nonprofit organization of your choice (with some limitations) at your own pace. "This could be ideal if you want to make a large gift right away but wish to take your time figuring out which organizations to fund," Navani says. Donating stocks that have appreciated could give you a double tax benefit: You avoid the capital gains tax on the appreciation and you also get a charitable deduction for the fair market value of the stock, as long as you've held it for at least a year.
5. Use stock losses to offset capital gains
In November or early December, mutual fund companies announce whether their funds will make capital gains distributions for the year. If you hold these funds in a nonretirement account, you'll be taxed on the gains. You generally can, however, offset those profits with any losses from securities (or any other capital assets) that you no longer want in your portfolio—provided you move quickly to sell those shares (or capital assets) by the end of the year. "You can generally use such losses to reduce capital gains, dollar for dollar," Navani says. And if you have more capital losses than capital gains, you may be able to deduct those losses from your income, though only by up to $3,000 ($1,500 if you are married and file a separate return) per year. If you have capital losses that exceed this yearly limit on capital loss deductions, you can carry over the unused losses to the next year and treat them as if you incurred the losses in the next year to reduce next year's taxes.
6. Consider tax-free muni bonds
If your income is at least $200,000—$250,000 for married couples filing jointly or qualifying widow(er) and $125,000 for married filing separately—you're subject to a 3.8% Net Investment Income Tax on the lesser of your net investment income or the excess of modified adjusted gross income over the threshold amount. You can't ease your tax burden this year, but you may be able to take steps now to help minimize taxes going forward. You could, for example, invest in tax-free bonds so at least a portion of your income would not be subject to federal taxes.
3 Questions to Ask Your Advisor
- What are some tax-efficient investing moves I may want to consider?
- Might a donor advised fund be a good fit with my giving strategy?
- Can I make an IRA contribution if my spouse has a 401(k) through his or her job?
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This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).