Year-end tax planning is rarely fun, but we’re glad not to have a repeat of the Fiscal Cliff and government shutdown dramas that marred the end of the past few years. 2013 and 2014 ushered in major changes to the tax code in the form of the American Taxpayer Relief Act of 2012 (ATRA), which ended the Fiscal Cliff standoff, and the Affordable Care Act (ACA), which went into effect in 2014 for most taxpayers. While these two laws did not significantly affect most Americans, wealthy taxpayers saw an increase in their marginal income and capital gains taxes, as well as two new Medicare taxes.
If you’re concerned about owing Uncle Sam this year, there may still be some last-minute moves that you can make to lower your tax burden. While our specialty lies in wealth management, we have worked with our CPA friends to compile these tips for you. Before acting on any of the advice in this communication, we suggest you consult with your personal tax professional. If you don’t have an accounting professional that you enjoy working with, please let us know and we will introduce you to one of our trusted associates.
The IRS recently announced its inflation adjustments for tax year 2015 and they are briefly summarized below:
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ACTIONS THAT COULD BE TAKEN
Get Organized
Now is an excellent time of year to get your financial house in order. Gather cash receipts to help you calculate possible deductions and miscellaneous payments. Do you have a hobby or activity that generates income? If so, any losses might also be eligible for deduction. Have you made home improvements? Charitable contributions? Get all of your documentation together early to make your life a little easier in April and consult a tax professional to discuss your personal situation.
Contribute the Maximum to Your Retirement Plan
You have until April 15, 2015 to make IRA contributions for 2014, but the sooner you get your money into the account, the sooner it has the potential to start growing tax-deferred. Making deductible contributions also reduces your taxable income for the year. In 2015, you can contribute a maximum of $5,500 to an IRA, plus an extra $1,000 if you are 50 or older. This limit can be split between a traditional IRA and a Roth IRA if you desire, but the combined limit is still $5,500 or $6,500, respectively.
Check Your IRA Distributions
You are required to make minimum distributions from your traditional IRA by April 1st following the year in which you reach age 70 ½. So, if you turned 70 in August 2014, you’ll turn 70 ½ in March 2015, and will need to start taking RMDs April 1, 2016. Failing to take out enough triggers a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and the amount in the account at the beginning of the year.
Contribute or Set up an Employer-Sponsored Retirement Plan
Tax-deferred investing is a smart choice because it allows your money to grow tax-free until you withdraw it. Maximize your 401(k), 403(b), 457, and TSP contributions, which are $17,500 or $23,000 if you will be age 50 or older in 2014, and will increase to $18,000 and $24,000, respectively, in 2015. If you are a solo-prenuer, please consider the benefits of a Solo or Individual 401k plan.
Weigh the Benefits of Loss-Harvesting
In order to avoid paying capital gains taxes, many investors sell off investments such as stocks that have experienced losses in order to help offset any taxable gains realized during the year. If you think that you may have a heavy capital gains burden this year, talk to your tax professional and financial representative about whether loss harvesting may be a good strategy for you. Try not to wait until December to plan for this.
Pay Attention to Your FSA
Remember that tax-free withdrawals can be taken from FSAs for qualified medical, dental, and child-care costs in 2015. Depending on your employer’s policies, you may lose any balance left in these accounts at the end of the year, so take advantage now by filling prescriptions early, making medical or dental appointments, or scheduling elective surgeries.
This is also the time of year when you may need to specify how much salary you’ll contribute to your flexible spending account. In 2015, the annual limit for employee contributions to sponsored health FSAs increases to $2,550 from $2,500 in 2014. The IRS also made an important change to FSA rules, and will allow. employees with “Section 125 Cafeteria Plan” FSAs to either carry over up to $500 of their account balance or have a two and a half month grace period. The grace period would allow employees to use money from the previous tax year to cover qualified medical expenses until mid-March of the next year. Employers can allow employees to have either the carry-over provision or the grace period, but not both. Check with your employer to see whether they will allow the new rules to apply in the 2015 tax year.
CONCLUSION AND STEPS TO TAKE
We hope you have found this report to be informative and that you will find some of these strategies useful as you go through your tax planning process this year. One of the ways we help our clients is by working hard to provide tax-smart investment strategies to minimize the impact Uncle Sam can have on your bottom line. In addition, we consider it our responsibility to educate you about things that could affect your financial future. If you have any questions about your taxes or how tax-efficient planning can help reduce your tax burden, please give us call. We also recommend that you speak with a qualified tax professional who can advise you on the specifics of your personal tax situation.
Footnotes, disclosures and sources:
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About Your Columnist
Windus Fernandez Brinkkord is a featured columnist for Women Taking Charge, the official blog of Connected Women of Influence, where she covers the intersection of women in business and managing their investments and taking charge of their financial future. Currently, Windus is Senior Vice President of Investments with Trilogy Financial Services, a financial services company that focuses on helping business owners and individuals build and manage wealth.
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