It's Time to Focus on Taxes


Year-end is fast approaching and the time for tax planning is slipping away.  Forbes and Morningstar published articles as a reminder of familiar actions investors may take to reduce their tax burden.


1. Contribute to a tax-advantaged savings plan.

Contributing to a 401(k) or an IRA may be the smartest tax move that most taxpayers can make. Not only does it reduce your taxable income for the current tax year and allow your potential earnings to grow on a tax-deferred basis, it also helps get you closer to achieving your retirement savings goal.


Contributions to your 401(k), 403(b), or similar workplace retirement plan must be made by December 31, 2015, to impact your 2015 taxes, so you need to act quickly to increase your deferral. The 2015 401(k) contribution limit is $17,500 ($23,000 for people age 50 or older). With a non-workplace IRA, you have until April 15, 2016, to make a 2015 tax-deductible contribution of up to $5,500 ($6,500 if you’re age 50 or older).


Other possibilities for tax-advantaged plan contributions are a Simplified Employee Pension plan (SEP), for self-employed individuals, or a Health Savings Account (HSA). Contributions to either of these plans can be made up until April 15 and still apply to 2015.


2. Adjust your withholding.

Ideally, the amount of money withheld from your paycheck or sent to the IRS in quarterly payments should come very close to your actual tax liability. Withhold too little and you could have a big tax bill when you file your return. Withhold too much and you’re giving the IRS what amounts to a tax-free loan of money that you could be using to pay down debt or save for retirement (and, potentially, reduce your taxes). There’s still time to adjust your withholding for 2015 by making changes to the W-4 you have on file with your employer, or, if you make quarterly payments, by increasing or decreasing your payments between now and when the last 2015 payment is due in January. Keep in mind that the longer you wait, the fewer pay periods you’ll have to reach your target.


3. “Harvest” your investment losses.

If you have capital gains outside of your retirement accounts, you may be able to lower your tax liability through tax-loss harvesting. That simply means selling losing investments that no longer fit your investing strategy and using the loss as a write-off against some or all of your gains. If you employ a tax loss harvesting strategy, you must be aware of the wash-sale rule that disallows the write-off if you purchase substantially the same investment 30 days before or after the loss sale.


Note: The time has passed for the “double down” strategy of tax loss harvesting.  In Nov, investors could have bought shares of their losers, waited 31 days and then sold their original shares to maintain their position and capture their paper loss. Now, if investors want to harvest their loss for 2015, they either need to exit the position for 31 days or switch to a similar but not the same investment.




4. Contribute to charity.

Contributing to charitable causes before the end of the year is a tried-and-true tax-reduction strategy for taxpayers who itemize deductions. But remember to get a receipt for every contribution you make, not just those over $250. Also, if you want to be more strategic, you could open a donor-advised fund, which offers several advantages for managing your charitable-giving activity. You could, for example, contribute a lump sum to the fund before December 31, take the entire deduction on your 2015 tax return, and then instruct the fund to use the money to make next year’s gifts.


One strategy that offers two tax benefits is donating appreciated securities, such as stocks or bonds, to charity. The tax code allows you to use the current market value of the asset as a deduction without having to pay tax on the capital appreciation, so you get the charitable contribution deduction and avoid capital gains tax.


5. Use your annual gift tax exemption.

An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate and help reduce or avoid federal gift and estate taxes. This may include cash, stocks, bonds, and portions of real estate.


However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information. For more information, speak with your tax adviser and review IRS Publication 559, Survivors, Executors, and Administrators.


If you would like to contribute money toward a child’s education, consider a 529 plan account.

Contributions are generally considered to be removed from your estate. You can also make a payment directly to an educational institution and pay no gift tax.


Note: I prefer to use a Coverdell Educational IRA for the initial $3,000 per child contribution.  The Coverdell offers better control over the investment selection process and does not usually carry as high a fee as many 529 plans. 


6. Accelerate deductions.

In addition to charitable contributions, other types of deductions offer some flexibility. If you make estimated state or local tax payments, for example, you could send in the January payment before the end of this year. And maybe you could do the same with a property tax bill that’s due near the beginning of the next year. Other possibilities include accelerating payments for medical services or purchasing work-related items, such as uniforms, for which you are not reimbursed. Recognize, however, that increasing your tax deductions only makes sense if you have enough of them to exceed the standard deduction of $6,200 for single taxpayers, $12,400 for married couples filing jointly, and $9,100 for heads of household.