As 2015 draws to a close, there is still time to reduce your 2015 tax bill and plan ahead for 2016. This article highlights several potential tax-saving opportunities for you to consider.
Annual Gift Tax Exclusion: The most commonly used method for tax-free giving is the annual gift tax exclusion, which, for 2015, allows a person to give up to $14,000 to each donee without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donees (family and/or non-family). Thus, if an individual makes $14,000 gifts to 10 donees, he or she may exclude $140,000 from gift tax. In addition, because spouses may combine their exclusions in a single gift from either spouse, married givers may double the amount of the exclusion to $28,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year. Qualifying tuition payments and medical payments do not count against this limit.
IRA, Retirement Savings Rules
Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2015 is $5,500. For 2015, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,500 for these individuals. Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their Adjusted Gross Income (“AGI”). For 2015, the AGI phase-out range for deductibility of IRA contributions is between $61,000 and $71,000 of modified AGI for single persons (including heads of households), and between $98,000 and $118,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.
IRA Rollovers: As of 2015, taxpayers may make only one IRA-to-IRA rollover per year. (Direct rollovers from trustee to trustee are not affected.) An attempted rollover after the first will be treated as a withdrawal and taxed at regular rates, plus a possible 10% early withdrawal penalty.
Roth IRA: This type of IRA permits nondeductible contributions of up to $5,500 for 2015, but no more than an individual’s compensation. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59 1/2 . Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2015 for persons with an AGI above certain amounts: $183,000 to $193,000 for married filing jointly, and $116,000 to $131,000 for single taxpayers (including heads of households); and between $0 and $10,000 for married filing separately who lived with the spouse during the year.
401(k) Contribution: The §401(k) elective deferral limit is $18,000 for 2015. If your §401(k) plan has been amended to allow for catch-up contributions for 2015 and you will be 50 years old by December 31, 2015, you may contribute an additional $6,000 to your §401(k) account, for a total maximum contribution of $24,000 ($18,000 in regular contributions plus $6,000 in catch-up contributions).
Deferring Income to 2016
If you expect your AGI to be higher in 2015 than in 2016, or if you anticipate being in the same or a higher tax bracket in 2015, you may benefit by deferring income to 2016. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket.
Accelerating Income into 2015
In limited circumstances, you may benefit by accelerating income into 2015. For example, you may anticipate being in a higher tax bracket in 2016, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2015 will be disadvantageous if you expect to be in the same or lower tax bracket for 2016.
Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid. Under this rule, if your tax rate is going to increase in 2016, it is a smart strategy to postpone deductions until 2016.
State Taxes: If you anticipate a state income tax liability for 2015 and plan to make an estimated payment most likely due in January, consider making the payment before the end of 2015.
Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.
Timing of Sales: You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income. When and whether to recognize such losses should be analyzed in light of the possible future changes in the capital gains rates applicable to your specific investments.