Tag Archives: tax

Year-End Tax Planning Ideas – Part 1

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.  We have compiled a checklist of actions that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

Below is part one of a two-part series – this first is aimed at ideas for individuals.

Year-End Tax Planning Moves for Individuals

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later.
  • Postpone income until 2017 and accelerate deductions into 2016 to lower your 2016 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2016. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2017 will result in a higher 2017 tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • It may be advantageous to try to arrange with your employer to defer, until early 2017, a bonus that may be coming your way.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2016 if you won’t be subject to alternative minimum tax (AMT) in 2016.
  • Estimate the effect of any year-end planning moves on the AMT for 2016, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state and local property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2016, or suspect you might be, these types of deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you become eligible in or before December of 2016 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2016.
  • Consider increasing charitable deductions by the end of the year.
  • If you are thinking of installing energy saving improvements to your home, such as certain high-efficiency insulation materials, do so before the close of 2016. You may qualify for a “nonbusiness energy property credit” that won’t be available after this year, unless Congress reinstates it.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
  • Maximize retirement deferrals such as 401K, Simple Plan, catch-up contributions if you are over 50, DB plan, etc.

Multiple Retirement Accounts? Considerations Before Consolidating

Is your retirement portfolio a mess? Sometimes a natural result of changing jobs several times over your lifetime can be an accumulation of several retirement accounts. For example, you may have three 401(k) accounts, a Roth IRA and a couple of traditional IRAs.

Is it best to leave everything as is, keeping a mishmash of accounts, or is consolidation worth considering?

If you are contemplating consolidation, here are some factors you need to take into account:

Roth IRAs – If you are in a consolidation mood, one thing to remember is you don’t want to mix the money in a Roth IRA with the money in a traditional IRA or a 401(k) account. The reason: Contributions to a Roth IRA have already been taxed, so you don’t pay tax on them when you reach retirement and begin withdrawing money. But with traditional IRAs and 401(k) accounts, the taxes were deferred so they are subject to tax when you begin withdrawals.

Nondeductible IRAs – Money placed in a nondeductible IRA, as the name implies, isn’t a deduction on your income taxes. That means you won’t pay any taxes on the money you contributed when the time comes to withdraw it either. Just as with a Roth IRA, you don’t want this money mixed with retirement money that is taxed when it is withdrawn.

Merging 401(k) accounts – Often you can merge a 401(k) from a previous employer into a 401(k) at your new employer. That kind of consolidation can be convenient because you just have one account to monitor. But it’s not always the best strategy because some 401(k) plans are better than others. Fees with the old plan might be lower than the new plan, or the investment options might be more varied. You also have the option to roll the old 401(k) into an IRA, which could be worth considering depending on your circumstances.

The IRS is Not Always Right

Quotes from actual IRS correspondence received by clients:

“Our records show we received a 1040X… for the tax year listed above, We’re sorry, but we cannot find it.”

“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken.”

“Payment is due on your account. Please submit payments on or before June 31st to avoid late payment penalties and interest.”

It’s pretty tough to pay a balance due of $0 on June 31st when June only has 30 days. The message should be clear. If you receive a notice from the IRS do not automatically assume it is correct and submit payment to make it go away. The same is true for any state notices. They are often in error. So what should you do?

Stay calm – Try not to overreact to the correspondence. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.

Open the envelope – You would be surprised at how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category try to remember that the first step in making the problem go away is to open the correspondence.

Careful review – Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.

Respond timely – The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.

Get help – You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.

Correct the IRS error – Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.

Certified mail is your friend – Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.

Don’t assume it will go away – Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.

The PATH Act Does More

The new Protecting Americans from Tax Hikes Act of 2015 (PATH Act) does more than just extend tax breaks. It also addresses tax administration and other matters. For instance, the new law:

  • Approves a budget of $11+ billion for IRS operations
  • Codifies the Taxpayer Bill of Rights
  • Prohibits IRS employees from using personal email for work
  • Amends certain Tax Court procedures
  • Explains higher education information reporting
  • Revises requirements for Individual Tax Identification Numbers (ITINs)
  • Clarifies penalties for improperly claiming tax credits
  • Postpones the “Cadillac tax” on high-cost health insurance plans from 2018 to 2020
  • Increases the penalty for reckless and willful conduct by paid tax return preparers

All in all, the PATH Act includes more than 80 provisions that have nothing to do with protecting taxpayers from tax hikes.