Time for Year-End Tax Planning

Sep 2015

As I write this, fall is now official and we are approaching the last three months of the year. This is a great time to review your tax situation for 2015 and estimate your potential tax bill while there is still time to make some adjustments.

The first thing you need to do is review your income and what you anticipate to earn this year. If your income is higher than last year, you should estimate what your taxes will be to see if you are going to come up short or not.
If you haven’t already maxed out your workplace retirement plans (i.e. 401(k), 403(b), etc.) now is a great time to increase your tax deferred contributions to lower your tax bill. The maximum contribution amounts for 2015 is $18,000 or $24,000 if you are 50 or older. If you have a SIMPLE plan at work, 2015 contributions are $12,500 or $15,500 if you are 50 or older. If you know you will contribute the maximum to your retirement plan, you may have to increase your tax withholding. Complete a new W-4 and turn it in to the department that handles payroll.

High deductible health insurance plans are becoming more and more popular at work. If you have one of these plans, you can contribute to a Health Savings Account (HSA) account. The money you contribute is deducted from your taxable income, which lowers your tax bill. These contributions can be used on qualifying medical expenses tax-free, and unused amounts are carried forward from year to year. The contribution limit for 2015 is $3,350 for individual coverage and $6,650 for family coverage. If you are 55 or older you can add an additional $1,000 to this limit. You can increase your contribution if you are having it deducted from your paycheck, or you can send in a payment directly to your health savings plan, which can then be deducted on your income tax return. If you are sending in a contribution directly to the plan, you have until April 15th to do so.

If you have children or grandchildren and have a 529 savings plan for them, you can lower your MI state income tax return, by making a contribution. The 529 plan is a great way to save for college expenses and offers you a tax break at the same time. Michigan allows an annual deduction of up to $5,000 on a single return and up to $10,000 on a joint return. If you happen to live in another state, look at that state’s plan to see if they have a tax deduction benefit.

If you have a taxable brokerage account, look at harvesting some tax losses, by selling your losers. If you have investments that have lost value in the current volatile market that we find ourselves in, you can sell the investments that have lost value and use the tax loss to offset some capital gains you may have earned. In addition to the offset, up to $3,000 can be used to reduce any ordinary income. If you don’t use all the tax losses in 2015, you can carry forward the loss to future years. If you want to reinvest in the same investment that you sold for a loss, you must wait 31 days before repurchasing it to avoid violating the “wash sale” rules. A similar investment can be purchased immediately; however, you may want to wait until January to do so. The reason being is that many funds pay out their capital gain distributions in the last quarter of the year. By purchasing the investment prior to the distribution, you will owe capital gains taxes on the money you invested without receiving much of a benefit from it. To avoid this problem, wait until January, or find out the date of the distribution and make sure to make the purchase after the distribution has been paid.

If you itemize your deductions and normally donate to qualified charities, make sure to make your donations prior to December 31st. Instead of a cash contribution, you may be able to get a larger deduction by donating your appreciated assets. As an example, let’s say you purchased XYZ mutual fund for $1,000 and it is now worth $10,000. The donation would be valued at $10,000 (value at the time of the donation) and if you were in the 28% federal tax bracket that would save you $2,800. If you sold the stock, you would owe tax on the $9,000 gain.

Taking steps now to ensure you have enough taxes paid in will avoid a surprise tax bill as well as a potential underpayment penalty – good luck!

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