Year-End Tax Planning for Individuals
There are some steps you can take to reduce your income tax liability for 2015. Many things will be similar to last year, as the 2015 tax rates and tables saw only small changes from those in 2014.
The first planning tool to consider is to reduce income tax liabilities by accelerating deductions into 2015 and/or deferring income to 2016. If you expect to be in a higher tax bracket in 2016, you may want to hold off on paying some deductions until 2016.
Other deductions and/or credits you may be able to control include:
Payment of state income taxes:
Paying your 4th quarter state income tax estimate in December rather than January 15th allows you to deduct the tax in 2015.
Charitable Contributions:
If paying by check, the date the payment is mailed determines the year in which to deduct. If paying by credit card, the date it is charged to your account determines which year the deduction can be taken.
We would like to remind you of the requirement to maintain a record of your contributions. For any contribution of $250 or more to any one organization you must keep the receipts from the charitable organization(s) and proof of payment. When contributions are less than $250 you can use bank records, credit card statements, or a receipt from the organization as proof of your donation.
For non-cash donations, you must have written receipts from the organizations. You should also have a description of what was donated and when. A deduction of $5,000 or more for a non-cash item or group of similar items will require a signed acknowledgement from the organization and a written appraisal from a certified appraiser. Clothing and household items must be in good used condition or better to be deductible.
The last day for making a qualified charitable donation from an IRA expired on December 31, 2014. Stay tuned as Congress may reinstate the tax break for contributions of IRAs directly to charitable organizations.
Medical expenses:
If you expect to exceed the 7.5% (age 65 and over) or 10% (under 65) of Adjusted Gross Income (AGI), consider having elective procedures done in 2015 or delay to 2016, depending on which year you are likely to exceed the AGI threshold. The advantageous 7.5% rate for age 65 and over is set to expire on 12/31/2016.
Mortgage interest:
Consider making your January payment in December to get the early write-off in 2015.
Itemized deductions:
If you are borderline on whether to itemize or not, consider grouping expenses in one year so you get the itemized deduction benefit for that year, and take the standard deduction the other year. The 2015 standard deduction amounts are: $12,600 for joint returns (plus $1,250 for each person 65 or older); $6,300 for singles (plus $1,550 if 65 or older).
Required Minimum Distributions (RMDs):
If you reached age 70 ½ during 2015, you are required to start taking RMDs from your traditional IRA and certain qualified retirement plans by April 1, 2016. Future RMDs are required to be taken by December 31 each year. If you wait until 2016 to take your initial RMD, you will have two RMDs to include in income for 2016. Depending on your income situation, it might make sense to take the initial RMD in 2015. The penalty for not taking timely RMD’s is 50% of the part of the RMD that was not withdrawn on time.
If you have multiple plans requiring RMDs, each RMD is calculated separately. However, you may combine the calculated RMDs and withdraw the combined amount from just one account. If you wish to do this, make sure you communicate with the financial institutions that hold your retirement plans.
Health Savings Accounts:
A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee (usually your local bank, insurance company or employer) to pay or reimburse out-of-pocket medical expenses you incur. HSA contributions are only allowed when you have a high deductible medical insurance plan. HSA contributions paid by your employer are excluded from gross income and contributions paid by you receive a deduction on page one of your Form 1040. Unlike a Flexible Spending Arrangement (FSA) contributions to an HSA remain in your account until you use them. 2015 contributions can be made up to April 15, 2016. However, the account must be in place prior to the end of the 2015 tax year. Once enrolled in Medicare, contributions to an HSA are not allowed.
Health Insurance:
The Affordable Care Act (ACA) requires that all individuals carry minimum essential coverage or make a shared responsibility payment (penalty). Individuals who obtain health insurance coverage through the ACA marketplace may be eligible for a premium assistance tax credit when filing your 2015 tax return.
It’s important to note that some of these strategies may not be beneficial based on your overall tax situation. For advice or assistance with your year-end planning, please contact our office.