Slashing 2015 Taxes with Year-End Planning

Year-end tax planning should begin soon. Many people wait too long. By the time they come up with a year-end tax reduction plan, it is too late to execute much of it or they missed opportunities earlier in the year. Start early and reap the savings of a solid plan.

A good year-end tax plan considers more than one year. Coordinate at least this year and next year to minimize total taxes over the two years. A good plan also considers more than the regular income tax. A tax plan that’s “too good” might trigger the alternative minimum tax.

Also, don’t overlook the stealth taxes. A move might not seem worth the trouble because it doesn’t save enough regular income tax, but there could be additional stealth tax savings that make it worth while. Stealth taxes are extra taxes or reductions in tax breaks imposed as your adjusted gross income increases. The stealth taxes include taxes on Social Security benefits, reductions in itemized deductions and personal exemptions, the Medicare premium surtax, the additional Medicare tax on income, and more.

Let’s start planning with your investments.

Be careful about making mutual fund purchases in taxable accounts late in the year. Fund’s have to distribute to shareholders most of their net income and gains for the year, and most funds make their distributions near the end of the year. The distribution would be taxable to you, though it essentially is returning part of your investment. Most funds now begin estimating their year-end distributions sometime in October or November. The estimated amount and distribution dates are either posted on their web sites or available by calling the fund. Research this information if you’re considering an investment late in the year. It might make more sense to wait until after the distribution to invest.

Don’t forget that you might qualify for the 0% long-term capital gains tax rate. When your income before considering long-term capital gains has you in the 10% or 15% tax bracket, you can take long-term capital gains tax free until the gains lift you into the 25% bracket.

The 25% bracket starts at taxable incomes of $74,901 for married couples filing jointly and $37,451 for singles. When considering other possible year-end strategies, keep in mind that if you are in the lower range of the 25% bracket, then tax moves (such as deferring income or increasing deductions) that drop you into the 15% bracket also reduce your capital gains rate to 0%.

Before deciding to take more gains, be sure to consider the effects of taking more capital gains on the rest of your tax return. The higher income could trigger more taxes on your Social Security benefits or increase state taxes.

Consider selling losing investments held in taxable accounts. The capital losses reduce capital gains dollar for dollar. If your losses for the year exceed the gains you’ve taken, up to $3,000 of the excess losses can be deducted against other income. Additional unused losses can be carried forward to future years to be used in the same way.

After selling to deduct a loss, don’t quickly rebuy the fund, in either a taxable account or an IRA. Buying and selling the same fund within 30 days violates the wash sale rules. You won’t be able to take the loss deduction until you sell the new shares.

The 3.8% Medicare surtax applies to investment income of married couples with adjusted gross incomes above $250,000 and singles with AGIs above $200,000. We discussed this tax in detail in the June 2013 visit. Read that article if the tax might affect you.

For the rest of your tax return, consider deferring some income until next year and accelerating deductions into this year. But if you think you’ll have more income or be in a higher tax bracket next year, do the opposite.

For example, consider bunching some charitable contributions into this year that you would have made next year. Mail the checks or have the contributions on your credit card by December 31. Also, consider donating appreciated investment property instead of cash or using the other charitable giving strategies we discussed last month.

You also might be able to pay some state and local taxes by December 31 of this year that aren’t due until next year. Mail your estimated income tax payment early or pay property taxes in December if they are due in January.

The same is true with mortgage payments. Make your January payment in December and you’ll be able to deduct the interest this year. Of course, if you don’t do it again next year, then you’ll have 13 months of interest deductions this year and only 11 months of deductions in 2016.

Make a careful review of your out-of-pocket medical expenses if you itemize expenses. Our February 2015 visit discussed deductible medical expenses in detail. Review it, and you might be surprised to learn what’s deductible.

If you’ve already reached or are near the threshold for deducting medical expenses (7.5% of AGI for those 65 or older or 10% for everyone else), consider having any elective procedures, updating your eyeglasses, or incur-ring other medical expenses by December 31.

Some retirees, especially those without mortgages, aren’t able to itemize deductions each year. Their itemized expenses don’t exceed the standard deduction ($12,400 for married couples filing jointly and $1,200 higher if 65 or older; $6,200 for singles and $7,750 if 65 or older). Consider bunching itemized deductions in one year as just discussed so you’ll itemize expenses one year and use the standard deduction the next.

As we discussed earlier before implementing any year-end tax strategies, check to see if taking too many tax-reducing actions will trigger the alternative minimum tax. We discussed the AMT in detail in the November 2014 visit. It is available in the Archive on the members’ section of the web site at www.RetiremenWatch.com.

RW September 2015.