With the busyness of the holiday season, it’s easy to forget about things like tax planning. After all, we’d rather focus on having fun with our friends and family! However, there isn’t much you can do to improve your tax situation after December 31st for 2015, so now is the time to do a little planning so as not to miss out on tax-saving or retirement saving opportunities and avoid penalties. (After all, the IRS has ways of knowing who has been naughty!).
1. Roth IRA Conversions: There were income limitations on converting regular IRA’s to Roth IRA’s, but no longer, now anyone can convert IRA’s to Roth’s as long as they are able and willing to pay the tax on the conversion. Why would you want to do this? Because converting to a Roth IRA will guarantee you will owe no income tax on the funds if withdrawn during retirement because you pay the tax now. For example, if your income dropped in 2015 due to a job change, you might consider converting some of your IRA to a Roth because you will be in a lower tax bracket and pay less taxes than you might in future years. The deadline for conversions is December 31, 2015, but you will want to do this by at least December 22nd to make sure the paperwork gets processed with your custodian.
2. Establishing a New Qualified Retirement Plan: If you are self-employed and want to establish a qualified plan such as a 401(k), money purchase, profit-sharing or defined benefit plan, it must be set up by December 31st. Many people confuse this deadline with the SEP IRA deadline that can go into the next year, including extensions.
3. Max Out Qualified Plan contributions. If you contribute to a 401(k) or 403(b) at work and have not contributed the maximum and are able to, talk to your payroll department to increase your contribution before December 31st. For those under 50, the maximum contribution is $18,000 and for those over 50, the maximum contribution is $24,000. At the very least, try to contribute up to any employer match.
4. Take RMD’s (Required Minimum Distributions) on retirement accounts if you have reached age 70 ½. The minimum distribution rules apply to traditional IRA’s, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. If you don’t take the distributions or don’t take enough out, you may have to pay a 50% excise tax on the amount not distributed as required.
5. Take MRD’s From Inherited IRAs. If you have inherited an IRA from someone other than a spouse, you must take minimum required distributions beginning in the year after the year of death of the original owner and by December 31st of that year. To calculate the MRD, the IRS has a Single Life Expectancy table and each year you would subtract one year from the initial life expectancy factor. Fortunately, there are on-line calculators to help you do this!
6. Review Your Charitable Contributions. If you itemize deductions and are charitably minded, you will want to donate what you plan to before December 31st . You may deduct an amount up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. Good to know: donations made by check are considered delivered on the day you mailed it.
7. Donate Highly Appreciated Assets To Charity. Any long-term appreciated securities, such as stocks, bonds or mutual funds may be donated to a public charity and a tax deduction taken for the full fair market value of the securities up to 30% of the donor’s adjusted gross income. In addition to the tax deduction, the donor avoids any capital gains taxes. Probably the easiest way to do this is to set up a donor-advised fund –it’s like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they’re ready.
8. Do Some Tax-Loss Harvesting. This is the practice of selling a security that has experienced a loss. By selling the security and taking the loss, an investor can offset taxes on capital gains or up to $3000 on ordinary income. The sold security can be replaced by a similar one, maintaining the optimal asset allocation and expected returns. When doing this, watch out for the wash-sale rule: your loss is disallowed if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire a substantially identical security.
And, don’t forget to take a sip of that punch!