Year End Tax Planning Strategies: Here are 8 Cost Saving Tips!
Back in the days when Congress went to work and got things done in a timely and predictable fashion, year-end tax planning was a straightforward process: everybody knew what the rules were and could plan accordingly. Unfortunately, in recent years the Congress has moved a bit more slowly, leaving those hoping to take advantage of all available tax strategies waiting on pins and needles to see whether tax provisions that have expired or are expiring will be extended or renewed.
Despite the lack of complete information, those who are looking for ways to save on their tax liability will still have plenty of opportunities based upon some of the rules that are firmly in place.
Here are eight cost-saving tips that can provide real advantages to small businesses and individuals.
- Convert Your IRA into a Roth IRA - If you have a traditional IRA and your income for the year is lower than usual, it may be worth your while to convert it into a Roth IRA. In fact, with the stock market's recent poor performance, if your IRA's value has tumbled it may still be a good idea. Either way you can get into the Roth IRA at a lower tax rate, and increases that you realize when you retire will be tax free.
- Avoid Penalties by Remembering Your Minimum Required Distribution - Taxpayers over the age of 70 1/2 who have an IRA, 401(K) or other employer-sponsored retirement plan are required to take a Minimum distribution (RMD) or else pay a penalty of 50% of the amount that you were supposed to withdraw.
- Take Advantage of the Full Sec 179 Expensing Allowance Deduction - Congress raised the business property expensing option for 2015 to $25,000, allowing business that make purchases during the tax year to deduct almost all of the money that they spend on capital outlays for equipment and machinery. Make your purchases in time to take advantage of the deduction, and keep your ears open because there's a chance that the limit may be raised before the year is over.
- Increase Your Investment Basis - In order to record a business loss on a partnership or S corporation, the amount that you can deduct can't be greater than your basis in the entity. If you want to write off a greater loss, increase your basis by increasing your investment.
- Capital Gains and Losses - There are several ways that you can utilize capital gains and losses to yield a tax advantage, but choosing the right strategy depends upon your situation. If you've had a year that puts your tax bracket at 15% or below, then you qualify for a zero percent capital gains bracket. This means that you can benefit from the bad year by paying no taxes on all or part of your long term gains. If you are an investor whose portfolio was impacted by the market downturn you might want to take advantage of the $3,000 allowable annual capital loss allowance by offsetting some of your gains with losses. Remember that if your losses exceed the limit you can carry them forward into tax years in the future.
- Undoing What's Been Done in a Roth IRA Conversion - If you tried to take advantage of a Roth IRA Conversion earlier in the year and now find that you have to pay more taxes than you would have had you timed your action for after the market's recent drop, you have the opportunity to have a do-over. It's called "recharacterizing" a conversion, and all you need to do it take the amount that you converted (along with any earnings and deducting any losses) and transfer it back from the Roth IRA to the traditional IRA. You can't take the distribution yourself - the transaction has to be a trustee-to-trustee- transfer. Once you've taken care of it you can go back and reverse it again after a specified period of time, which is usually about a month.
- Don't Forget the Gift Tax Allowance - Taking advantage of the gift tax allowance doesn't actually save you any tax liability, but it is still important to remember that you're able to give up to $14,000 each to an unlimited number of people without any taxes being imposed. If you don't use the allowance this year, you can't carry it over into the next.
- Self-Employed? Set Up a Retirement Plan - Self-employed individuals are able to set up a Self-Employed Retirement Plan that will entitle you to deductions on contribution. If you want to take advantage of one of these plans, check with your tax professional, because you may be eligible to take a pension start-up credit, and certain plans need to be set up before the end of the year even though you can make contributions into next year.