With the end of the year quickly approaching and the holiday stretching our free time thin, it is a great idea to squeeze in a little bit of tax planning to help yourself out before 2016.
There are many tax strategies that involve making decisions during the current year, therefore it is essential to get an idea of where you stand tax wise going into the close of 2015.
Here are a few of the most widely used strategies to help ease your tax burden.
Personal Tax Planning Tips
1. Charitable Contributions.
Cash contributions must be documented in order to be deductible and often charities do not provide full, if any, documentation of your contribution. Getting this information around now can prevent you from scrambling on April 15th and ultimately making the decision to not take the deduction.
Taxpayers have many options to give to charities if cash is not available, including giving appreciated stocks/mutual funds which includes the extra benefit of not paying taxes on the gain.
It is possible we will see some movement in Washington to extend legislation allowing taxpayers at least 70 ½ years old the option to make a tax free distribution (up to $100,000) from their IRAs directly to charity, although we may not see this change until just before year end.
Always keep in mind that donating to individuals, political groups, social clubs and foreign organizations will not qualify for a deduction.
2. Manage Your Gains and Losses.
Selling stocks or other investments are great pieces to use in your tax strategy as you usually have the ability to sell them when needed. Capital losses are limited to offsetting capital gains plus the ability to take an extra $3,000 against your income, with any remaining losses being carried forward to future years. If you have had some capital losses piling up it might be a good time to sell other stocks at a gain that will be offset by these previous losses. This allows you to realize some capital gains and not increase your tax bill, especially helpful if your income level has you in paying the additional 3.8% Net Investment Income Tax.
Note: Selling a security then purchasing that same security back within a 30 day period qualifies as a wash sale and results in the loss being disallowed.
3. Grouping together multiple itemized deductions.
Itemized deductions must total to a minimum amount before they are preferred over the standard deduction ($6,300 for single filers and $12,600 for married filing joint). If you're near this minimum each year but never over it, your itemized deductions aren’t helping save you taxes. However, accelerating future itemized deductions by paying them in the same year as the others can help put you over the standard deduction. This is often accomplished by paying the next season’s property taxes in December instead of January or donating to charities before the year end instead of after.
Bonus: Donating to a charity via credit card is considered paid for tax purposes in the year of charge; even if you do not pay that credit card balance off until the following year. Just remember to get the proper documentation for your donation!
4. Contribute to retirement plans
Retirement plans like IRA’s and 401K’s are funded with tax deferred money so consider making some amount of contribution to these accounts before year end. Those contributions will not only help save towards an early retirement but they can help save your tax bill come April 15th.
Business Tax Planning Tips
1. Estimate where your business income level will be at year-end.
It is always a good idea to get a handle on where you stand as the year-end approaches. This serves as a benchmark with which you can plan your tax strategies. Many tax extender bills won’t be acted on as the year-end approaches which unfortunately leaves taxpayers in a bit of a limbo. The largest extender legislation dealing with bonus and fast depreciation are the most relevant to our clients. Having a good estimate of your business income will allow you to minimize the effect of this limbo and take additional steps to bring that business income level within an acceptable range.
2. Accelerate your deductions and defer business income.
If you are on the cash basis, there are opportunities to pay some bills or even prepay other expenses, supplies, etc. If you calculated an estimated loss for the year, consider collecting receivables as the extra income may not add any taxes to your bill, helping to level out your tax liability from year to year.
3. Get together the information return requirements now.
Late and/or incorrect informational returns (W-2’s and 1099’s) leave taxpayers open to huge penalties that have more than doubled from the prior years. There is no doubt the IRS is increasing their scrutiny on these returns and the increase in penalties shows that. Scrambling to put together the information needed to file correct 1099’s by February 1st is not a sound business practice and may leave the taxpayer facing unnecessary expenses related to this process.
By: Daniel Crawford, CPA