End-of-the-Year Tax Questions – (Q & A)

Dec 2016


Dear Rick:
I have an end-of-the-year tax question that I hope you can help me with. Normally, I would ask my accountant; however, I’ve had a recent falling out with my accountant and I no longer have confidence in him. I plan to hire a new accountant sometime after the first of the year. This year because of family issues, I virtually did not work. My W-2 will show about $8,000 and the only other income that I have is a few thousand dollars in interest. I am going back to work in January and my salary will be about $75,000. My first question deals with charitable contributions. Typically, I make my contributions at the end of the year and I question whether it makes sense to make them this year or just wait until next year. My second question is since I did not work a full year, am I still eligible for a Roth IRA contribution? Lastly, is there anything else you think I should do this year considering my low income?

I think without question it would make sense to delay your charitable contributions into next year. This year, from a tax standpoint, you’re going to have no taxable income. Therefore, the deductions for your contributions are worthless from a tax standpoint. Next year with your higher income, more likely than not you are going to be able to itemize your deductions and as a result, those charitable contributions will be of value to you. Therefore, my recommendation is to delay your deductions.

I recognize that for most people who make charitable contributions the primary reason is to help the charitable organization achieve their goals. The tax consequences are secondary. However, in the situation at hand by delaying making that contribution until the beginning of 2017, it’s a win-win situation. The charity is still getting their money to help them achieve their goal and at the same time, you should be able to receive a tax benefit for your charitable donation. Therefore, it’s a win-win situation.

With regard to whether you are eligible to contribute into a Roth IRA, the answer is yes. The fact that you only worked part time is relatively meaningless. The key is that you have earned income and since your taxable income is not above the thresholds for a Roth IRA contribution, there is no problem with you contributing to one. As a side note, I will mention I think it would be a great move for you to consider a Roth IRA. In fact, for most people, I believe Roth IRA’s are a great investment vehicle that more people should consider.

Is there anything else you can do from a tax standpoint that makes sense? I do believe there is. What you should explore is the idea of doing a Roth conversion. You can convert enough of your traditional IRA into a Roth IRA so you still stay in a zero bracket situation. Therefore, the affect would be that you’ve taken tax-deferred money, turned it into tax-free money and it costs you nothing.

You should also consider delaying paying your property taxes till next year. Once again, the reason is that the deductions will not be worth anything to you this year but will be valuable next year. In fact any items that will be tax deductible to you, for tax reasons, should be delayed until next year.

One last note, remember that Roth IRA contributions can be made up until April 15th 2017, however, conversions must be completed before the end of the year; therefore, you must act immediately.

Good luck!