Year-End Tax Planning Considerations

By October 20, 2015News, Uncategorized

As the end of the 2015 tax year approaches, now is a great time to set aside some time to evaluate your situation and consider potential planning opportunities.  With that in mind, here are a few basic strategies that you might want to consider.

1. Defer Income and Accelerate Expenses. When you defer income, you postpone payment of the tax on that income. If there’s a chance that you might be in a lower tax bracket next year, deferring income might also mean paying less tax.

You should also look for potential ways to accelerate deductions.  If you itemize deductions you might be able to accelerate some deductible expenses–such as medical expenses, qualifying interest, or state and local taxes–by making payments before the end of 2015, instead of paying them in early 2016.  Or if you think you’ll be itemizing deductions in one year but claiming the standard deduction in the other, trying to defer (or accelerate) deductions into the year for which you’ll be itemizing might let you take advantage of deductions that would otherwise be lost.

Depending on your circumstances, you might also consider taking the opposite approach.  For example, if you think that you’ll be paying taxes at a higher rate next year (maybe as the result of a compensation increase or the planned sale of assets), you might want to look for ways to accelerate income into 2015 and defer deductions until 2016 when they could potentially be more valuable.

Before you employ income and deduction shifting strategies make sure to consider the alternative minimum tax (AMT).  The AMT is essentially a separate, parallel federal income tax system with its own rates and rules.  Since the AMT effectively disallows a number of itemized deductions that are otherwise deductible under the regular rules, traditional year-end strategies may be ineffective or actually have negative consequences.  As a result, it’s a good idea to consult a tax professional to explore whether you are subject to the AMT and, if so, which deductions will qualify for AMT purposes.

It’s also important to recognize that certain exemptions may be phased out and itemized deductions may be limited once your adjusted gross income (AGI) reaches a certain level.  This is especially important to factor in if your AGI is approaching the threshold limit and you’re evaluating whether to accelerate or defer income or itemized deductions.

Finally, several popular tax provisions expired at the end of 2014, including, but not limited to, qualified charitable distributions from IRAs.  Although it is possible that some or all of these provisions will be retroactively extended, they are currently not available for the 2015 tax year so plan accordingly.

2. IRA and retirement plan contributions. Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) could reduce your taxable income. For 2015, you’re able to contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional IRA ($6,500 if you’re age 50 or older).  The window to make 2015 contributions to an employer plan generally closes at the end of the year, while you typically have until the due date of your federal income tax return to make prior year IRA contributions.

3. Charitable Contributions: Contributing to charity is also a great way to give back and get an income tax deduction. A good way to maximize the tax benefits of your generosity is by donating appreciated stock rather than cash.  If you’ve owned the stock for more than one year, you can generally deduct its market value on the date of the gift (subject to certain AGI limitations) and avoid paying capital gains tax on the built-up appreciation.

On the other hand, taxpayers holding shares of stock with an unrealized loss might want to sell the shares themselves, donate the proceeds, and book the capital loss.  That way the full amount of the donation will be deductible and the tax-saving capital loss will be retained.

It’s important to make sure you get the full benefit of any gifts that you make.  To deduct charitable contributions, you need to make sure the gifts are completed by Dec. 31st.  Keep in mind that the process of making a charitable stock gift takes longer than a simple cash gift, so don’t wait until the last minute.

4. Harvest losses to offset gains. Another key year-end strategy involves selling investments to realize losses. You can then use those losses to offset any taxable gains you may have realized during the year.  If your losses exceed your gains, you can use up to $3,000 of excess loss to wipe out other income.  Losses in excess of the $3,000 limit can be carried over to subsequent years.

It’s worth noting that 2015 is the third year in which the net investment income (NII) tax of 3.8% applies.  This surtax is a product of the Health Care and Education Reconciliation Act of 2010 and applies to taxpayers with modified AGI above a certain threshold.  Taxpayers should consider the application of the NII tax in connection with timing capital gains and other NII-captured transactions (including interest and dividends).  Run-ups in the financial markets, combined with the fact that the NII thresholds are not adjusted for inflation may increase the need to implement strategies to avoid or minimize the NII tax.

5. Make sure to take required IRA distributions. Traditional IRA owners must starting taking regular distributions from their IRA by April 1st of the year following the year in which they reach age 70 ½. Failing to take out enough can trigger a severe penalty.  When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment.  Withholding is voluntary and you set the amount, but opting for withholding might help you avoid the hassle of making quarterly estimated tax payments and prevent unnecessary penalties.

6. Review your estate plan. Although estate planning strategies may not necessarily affect your income tax bill, it’s generally a good idea to review estate planning goals as the year-end approaches. The current gift and estate tax is set at a maximum 40% rate with a $5.43 million exemption amount per individual.  This exemption is portable between spouses.  The annual gift-tax exclusion allows each individual taxpayer to gift up to $14,000 per recipient ($28,000 per recipient for gifts from married couples) gift tax free without using any of the lifetime gift tax and estate tax exemption.  Proper planning may afford you the opportunity to transfer wealth, including assets that are expected to appreciate significantly in value, tax free.


While the strategies above can be effective in helping manage your tax burden, they are not all-inclusive or a destination in and of themselves.  A better starting point is a strategic plan tailored for your specific needs and goals.  Only by sitting down with your trusted advisors to define and prioritize your objectives and review them against your current situation can you know which solutions and strategies may be the most appropriate for you.

Bottom line – make it a priority to review your financial situation with your professional tax, legal and financial advisors.  If you act now, you still have time to make a difference in your 2015 tax bill.

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