· If you are in the upper tax brackets, harvest capital
losses as necessary to reduce capital gains tax, and to lower the Affordable
Care Act’s tax on net investment income.
Generally, short-term losses are preferred over long-term losses because
short-term gains bear a higher tax rate than long-term gains. Be sure to specifically identify the block of
securities you are selling to your broker.
Don’t trigger capital losses if you are in a low tax bracket. Be sure to avoid the “wash sale” rule that
applies if you purchase substantially identical replacement securities within
30 days before or 30 days after the date of sale.
· If you are in the lower tax brackets, harvest
long-term capital gains as necessary to fill in the lower tax brackets. For example, a zero percent long-term capital
gain tax rate applies through $74,900 of taxable income for joint tax returns! However, ordinary income fills up the low
brackets first, so some coordination is necessary to achieve a zero percent tax
rate.
· Be sure that any year-end charitable donations are
either delivered or mailed and postmarked by December 31st. Be sure that you obtain the required
tax-qualified receipt early next year so that documentation is available when
preparation of your income tax return begins.
If you want a charitable deduction but are not prepared to actually give
the funds to a charity at this time, consider using a donor advised fund (DAF)
to claim the deduction now. You can
select the charity later and “advise” the DAF to contribute to the charity
then.
· For those at least age 70 ½, consider using your
traditional IRA to make a direct charitable donation of up to $100,000 to a
public charity (but not a DAF). This
provision had expired at the end of 2014 but was just retroactively reinstated
for 2015 donations and has now been made permanent. The charitable IRA donation is also
considered a distribution for purposes of your 2015 minimum required
distribution. Coupled with the phase out
of itemized deductions, personal exemptions, and the net investment income tax,
the charitable IRA donation can be effective in lowering your overall income
tax. This strategy is also very
effective for Social Security recipients whose benefits are not fully subject
to income tax.
· Consider donating any long-term appreciated securities
to charity. You can claim a tax
deduction equal to the fair market value of the securities without triggering
tax on the capital gain.
· For those at least age 70 ½, and for those of any age who have
inherited an IRA, don’t forget to take your minimum required distribution by
December 31st to avoid a 50% penalty.
· Prepay state income tax unless you are subject to the
alternative minimum tax (AMT). Taxes are not deductible for the AMT.
· Consider accelerating ordinary income into 2015 if you
are subject to the AMT and may not be in 2016.
The top AMT tax rate is lower than the top ordinary tax rate.
· If you exercised incentive stock options (ISOs) in 2015
and the value of the stock has dropped, consider selling the ISO stock by
year-end in order to purge the AMT ISO adjustment so that you don’t pay tax on
value that has disappeared.
· Consider making a Roth IRA conversion if you are in a
low tax bracket this year.
· Keep a focus on your adjusted gross income (AGI). Many deductions and credits are lost, and
additional taxes can apply, depending on the size of your AGI. Lost tax benefits due to high AGI include the
deduction of personal exemptions, itemized deductions, some IRA deductions, the
ability to contribute to a Roth IRA, educational credits, taxation of Social
Security benefits, and Affordable Care Act taxes. Therefore, it generally makes sense to keep
your AGI as low as possible.
· For purposes of gift and estate tax planning, don’t
forget to use the $14,000 annual exclusion.
Giving cashier checks is advisable when cash gifts are made at year end
to be sure that the gift is completed in the 2015 calendar year.
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