With the holiday season here, it's easy to put tax planning at the bottom of your "to do" list.
Who wants to plan for taxes when you can enjoy family, friends and food? But if you ignore it, there's not much you can do to improve your 2015 tax situation after Dec. 31. Here is a short checklist of what to look at before the year ends:
1. Take your 2015 Required Minimum Distribution. If you're older than 70½ with just about any qualified retirement plan except a Roth IRA, IRS rules require you to take out a minimum distribution in 2015 that's income-taxable to you. Failure to withdraw the required amount may result in a 50 percent penalty on the amount not withdrawn by Dec. 31. If you've inherited an IRA from someone besides your spouse, you must take required minimum distributions (even from a Roth IRA) no matter what age you are. Generally speaking, these distributions must begin by Dec. 31 of the year after the year of death of the original owner.
2. Contribute the maximum to qualified plans. If you haven't yet contributed the annual maximum ($18,000 if younger than 50 and $24,000 if over) to your employer's 401(k) or 403(b) plan and can afford to, increase your contribu
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tion before Dec. 31. If you can't afford to catch up to the maximum, at least contribute up to any employer match.
3. Set up a new qualified retirement plan. If you're self-employed and want to establish a qualified retirement plan, it must be done by Dec. 31. The exception is a SEP IRA: This deadline is the due date for your tax return, including extensions. The deadline for 2015 traditional IRA contributions is still April 15, 2016, but if you're contributing to another qualified plan, consult your tax adviser to determine if a traditional IRA contribution is even deductible.
4. Consider tax-loss harvesting. Investors who sell assets for less than cost generally recognize capital losses that can be used to offset capital gains. If capital losses exceed gains, up to $3,000 of capital losses are deductible against ordinary income. Consider selling "under water" investments for tax reasons, especially if you have capital gains to offset.
5. Remember your favorite charities. If you are charitably minded and you itemize deductions, complete your donations before Dec. 31. You may contribute and deduct up to 50 percent of your adjusted gross income, but sometimes 20 percent and 30 percent of AGI limits apply. Remember: Donations by check are considered delivered on the day mailed.
6. Donate highly appreciated assets to charity. The best candidates for donation are assets owned more than a year and appreciated substantially above their cost. Why? You may deduct the full fair market value of the asset(s) donated (subject to the limits noted) even though you paid much less. Can't decide which charity to benefit? No problem! Consider establishing a donor-advised fund. It's like a charitable savings account: The donor gets the tax deduction when they contribute. Donors can then make grants out of the fund when they decide who to benefit later on.
7. Defer income and accelerate deductions. If you are a cash-basis taxpayer, any income you can delay receiving until 2016 delays taxes on that income for another year. If you need new equipment next year, buy it in 2015. You can deduct 100 percent of the cost up to $200,000 (via the Section 179 depreciation deduction) this year.
8. Look at conversion to a Roth IRA. Anyone can convert a traditional IRA to a Roth IRA these days. You must, however, pay the income tax on the amount converted. Why convert? Withdrawals from your own Roth IRA (after age 59 1/2) aren't income taxable or subject to RMD rules. If you've had a drop in income this year, consider converting some/all of your traditional IRA to a Roth IRA when your taxes might be lower now than later. Conversion might also make sense if you've made non-deductible traditional IRA contributions. Talk to your tax adviser before taking this step. The deadline for Roth conversions is Dec. 31.
There are many strategies available to help you save taxes in 2015. Talk to your tax adviser now to determine what fits best for you. That way, you may ring in the New Year with more money in your pocket!
Withdrawals from the ROTH account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for five years, whichever is later, may result in a 10 percent IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific issues with a qualified tax adviser.
Karin Grablin, CPA, is with SRQ Wealth Management, 1819 Main St., Suite 905 in Sarasota (941-556-9004) firstname.lastname@example.org and is a registered representative and investment advisory representative with LPL Financial, Member FINRA/SIPC.