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Congress is poised to make the tax break for IRA charitable donations permanent. The Bill cleared the House, is expected to pass the Senate and be signed by the President. Now you can be assured that donations made directly from your IRA will not be included in your taxable income and will be counted as part of your Minimum Required Distribution (MRD). Previously the provision was allowed to lapse and then at the very last minute revived by Congress five times!
Here are some additional tips to review before the end of the year to help lower your 2015 tax bill.
1. Withholding Tax
Review the amount of federal withholding during the year to determine whether you have paid enough tax through withholding and estimated tax payments to avoid an underpayment tax penalty. If you determine that you have not paid enough and you have wages which are subject to withholding, consider increasing your withholding for the balance of the year.
2. Harvest your losses
Tax loss harvesting is a significant year-end strategy which can be a challenging but rewarding exercise. The selling of investments, such as stocks and bonds in your accounts allows you to realize losses which can then be utilized to offset any taxable gains you may have realized during the year. Additionally, if losses exceed gains during the year, you are allowed to use up to $3,000 of the excess losses to wipe out other income received during the year.
3. Defer your income
Income is taxed in the year it is received, so consider any opportunity to defer your income into 2016. For example, you may be able to defer a year-end bonus, delay the sale of capital gains property or delay collection of certain business income. However, this comes with the caveat that if you expect your 2016 tax bracket to increase, you may want to accelerate income into 2015 in order to pay the tax at the lower rate. As such, planning is crucial before making any decisions.
4. Accelerate your deductions
Just as you may want to defer income into next year, you may want to lower your current tax liability by accelerating deductions into this year. However, again an analysis of this year’s income and next year’s income should be reviewed in order to determine how to best utilize the deductions. For example, if you aren’t receiving any tax benefit for deductions like property tax payments, making two payments in the same year, every other year, may afford you some overall tax savings.
5. Check Your IRA distributions
As the end of the year approaches, you want to review all your IRA accounts to verify proper amounts for minimum distributions were made during the year. Regular minimum distributions begin April 1st following the year in which you turn age 70½. Withholding on the distribution is voluntary; however, you may incur an underpayment tax penalty if you do not pay in enough tax through either withholding or by making timely estimated tax payments (Form 1040-ES). To avoid this, you can make an additional distribution at the end of the year and withhold the full amount or you can make an estimated tax payment using Form 1040-ES. Either way may help you avoid under-withholding tax penalties.
6. Flexible spending accounts
Although not exactly a year-end tax savings strategy, you shouldn’t overlook reviewing your flexible spending account, or FSA (if you have one). These accounts are subject to the use it or lose rules. Review the balance in the account and check with your benefits department regarding deadlines and carryovers so that you don’t end up wasting the deferred amount.
7. Gift Planning
Annual gift exclusion amount
For 2015, the annual exclusion remains at $14,000 per donee ($28,000 for married couple). These gifts can be given to as many individuals as you like, without eating into your lifetime exemption. In addition, the use of the unlimited gift tax exemption for direct payment of tuition and medical expenses does not count towards your annual exclusion per individual. As such, this exclusion is available in addition to the $14,000 annual gift tax exclusion.
Applicable exclusion amount
Review your lifetime gift and GST gifting opportunities to use the applicable exclusion amounts (in 2015 $5.43 million per individual and $10.86 million for married couple). The applicable exclusion amount will be increasing to $5.45 million in 2016.