Articles

Time for Year-End Tax Planning for Individuals by Jack Winter, CPA


Posted on November 12, 2015 by Jack Winter

With less than 60 days left in year, individual taxpayers should be thinking about and preparing for their tax obligations in 2015. In fact, there is still time for individuals to take action now to reduce their tax liabilities come April 15, 2016. Following are just a few strategies to consider.

Accelerate Deductions in 2015 and Defer Income to 2016

This tried-and-true rule of tax planning continues to provide individuals with opportunities to reduce their tax liabilities in any given year. Accelerating deductible expenses to reduce taxable income may include paying state and local income taxes, interest payments and real estate taxes in the current year, before they are due. However, taxpayers should be aware that certain deductions, such as mortgage interest and charitable contributions, will be reduced when an individual’s adjusted gross income (AGI) exceeds applicable threshold. For 2015, the amount is $258,250 for single taxpayers and $309,900 for married couples filing jointly.

To defer receipt of taxable income, individuals may postpone distributions, sales of appreciated assets or self-employment income. Another strategy to consider is making pre-tax contributions to a qualified retirement plan, such as an IRA or 401(k), which will essential defer income up to a maximum of $18,000.

Harvest Capital Losses

Taxpayers who cashed in their investments for a profit in 2015 may consider looking through their portfolios to identifying assets that have incurred losses and that they may sell to offset, or limit, their recognition of any capital gains. Tax-loss harvesting should be conducted under the counsel of a CPA or qualified financial advisor to ensure that any asset sales do not jeopardize an individual’s long-term financial goals and do not qualify as a wash-sale, in which investors claim a loss on a sale and repurchase the same or a similar security within 30 days before or after the sale.

Keep an Eye on AMT

Year-end tax planning strategies may inadvertently trigger an Alternative Minimum Tax (AMT) liability, which follow rules separate from those governed by the regular tax system in the treatment of income and deductions. Individuals should speak with a CPA to project tax liabilities and take action to time income and deductions in an effort to reduce or eliminate their exposure to the AMT.

Beware the Net Investment Income Tax

The IRS imposes a 3.8 percent surtax on the lesser of the taxpayer’s annual net investment income (NII), including interest, dividends and capital gains, or the amount by which the taxpayer’s modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers and $250,000 for married couples filing jointly. Reducing one’s NII tax requires taxpayers to reduce their NII or MAGI. Strategies to consider under the guidance of a CPA may include maximizing contributions to retirement accounts, such as 401(k)s and IRAs; converting a traditional IRA to a Roth IRA to exclude distributions from modified adjusted gross income; or spreading out gains over multiple years.

Give to Charity

Donations of money or property to qualified charitable organizations are fully deductible against income tax and AMT. Taxpayers who give appreciated property that they owned for more than one year will receive a deduction on the property’s fair market value at the time of the donation, rather than the taxpayer’s basis when they acquired the property. When giving to charity, taxpayers should consult with their advisors to weigh the risks and benefits of making donations of appreciated stock or property or establishing a charitable remainder trust.

Give a Gift

Individual’s may consider giving gifts that are less than the annual exclusion amount of $14,000 for singles, or $28,000 for married couples, to reduce taxable income and shelter assets from estate and gift taxes. The exclusion applies to gifts made before December 31 to an unlimited number of recipients. So, a single taxpayer can essential give gifts of $14,000 or less to as many people as they wish. Exclusion from gift taxes also applies to gifts of any amount given to a spouse or paid to an educational and medical institution to pay tuition or medical expenses on behalf of someone else.

Convert an IRA

Taxpayers anticipating lower-than-average income in 2015 may consider converting a traditional IRA to a Roth IRA to benefit from tax-free withdrawals in the future. However, if a taxpayer already made a conversion in 2015 and the value of the portfolio declined, the taxpayer may consider re-characterizing the conversion back to a traditional IRA before October 2016.

Take Required Minimum Distributions from Retirement Accounts

Taxpayers ago 70 ½ and above must take a required minimum distribution (RMD) from their traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k), 403(b) and 457(b) retirement plans by December 31, 2015, or risk a penalty of 50 percent of the undistributed amount. RMDs are treated as taxable income, excluding any amount that was previously taxed. Taxpayers who continue to work after 70 ½, may postpone their RMD until the year of their retirement.

The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work throughout the year with U.S. and foreign citizens and businesses to develop tax-efficient solutions to meet evolving financial needs.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Berkowitz Pollack Brant’s Tax Services practice, where he works with individual taxpayers and entrepreneurs on estate planning, tax structuring and business consulting. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email info@bpbcpa.com.