The holiday season is in full swing! Thanksgiving leftovers have made way for holiday cookies and candy, city streets and stores are decorated with lights and bows, and seasonal cards are arriving daily. What’s more, our thoughts are now filled with presents, party plans and family gatherings.
With so much to be done and merriment to be had, who really wants to think about year-end tax planning? Well, us! And yes, we know what you’re thinking: “Why now? I don’t want to think about taxes until April!”
Unfortunately, you don’t have until then to take advantage of planning strategies that can reduce your tax liability for 2015. Here are a few tactics to consider:
Tax-Deductible Retirement Plan Contributions
Employer-sponsored retirement plan: If you’re eligible to participate in an employer-sponsored retirement plan, such as a 401(k) or 403(b), you can make pre-tax contributions up to $18,000 if you’re under age 50 or $24,000 if you’re age 50 or older (unless your company has a lower contribution limit). If you haven’t maximized your contributions to your plan, it’s an effective way to defer paying taxes on current income until your retirement years. Some companies also allow for Roth (after-tax) contributions. If so, feel free to contact your advisor and we can discuss which option is best for your situation.
Traditional IRA: Depending on your adjusted gross income (AGI) for the year, you and your spouse may be able to take either a full or partial deduction for contributions to a traditional IRA. The contribution limit for 2015 is $5,500 for individuals under age 50 and $6,500 for those over the age of 50. And good news; you have until April 15, 2016, to make them. The AGI phase-out limits are listed below:
- Married filing jointly:
- AGI between $98,000 and $118,000: if both spouses are eligible to participate in a workplace retirement plan
- AGI between $183,000 and $193,000: if the spouse making the contribution isn’t covered by a workplace retirement plan
- AGI between $61,000 and $71,000: if eligible to participate in a workplace retirement plan
- No AGI limits for making a contribution if you aren’t covered by a workplace retirement plan
Gift of Appreciated Stock to Charity
If you plan to make any year-end charitable donations, one effective tax-savings idea is to donate appreciated stock instead of cash. The IRS allows individuals to donate securities to a charity that have gained value since the original purchase date; then take a deduction for the full fair-market value of the stock at the time you gift it. In addition to receiving a charitable deduction for the donation, the individual also avoids capital gains taxes that the security has accrued and would generally have to pay if it was sold rather than gifted outright.
Estimated Tax Payments for State and Local Income Taxes
The deduction for state and local income taxes isn’t based on how much you owe on Tax Day; instead, it’s determined by how much you paid during the year in income tax withholdings, estimated payments and tax liability when you filed your taxes for the prior year. If you think you’ll owe money on your state tax return for the current year, making an estimated tax payment before year’s end will increase your state and local income tax deduction (thereby increasing the amount of your total itemized deductions).
Required Minimum Distributions
If prior to May 1, 2016, you are age 70½ or older and own a traditional IRA account, 401(k) account or an inherited IRA, you must take a required minimum distribution (RMD) from your account(s) each year. It’s essential to ensure your RMD is complete before year end. If you don’t, there will be a 50% penalty on the funds you didn’t withdraw to meet the required distribution.
Estimated Tax Payments
Each year the IRS reviews your tax withholdings to ensure you withheld a certain percentage of income on a quarterly basis. If you don’t withhold enough, there’s an underpayment penalty. The two most common ways to calculate your quarterly estimated payments are the 90% Rule and 100/110% Rule:
- 90% Rule: Each quarter you pay 25% of 90% of your current year’s tax liability. The difficult part of this option is having a clear idea of how much you’ll owe in taxes for the current year.
- 100/110% Rule: Each quarter you pay 25% of 100% of last year’s tax (if your adjusted gross income was $150,000 or less for single or married filing jointly filers; or 25% of 110% of last year’s tax if your adjusted gross income was more than $150,000).
If you need to make an estimated tax payment for the last quarter of this year, you have until Jan. 15, 2016, to submit your payment.
Have questions about any of this? We’re happy to help. Simply contact your Redwood advisor and we’ll discuss the steps you should take to ensure you’re taking advantage of these tax-saving strategies. Happy holidays!