As the year draws to a close, it’s time to squeeze in some tax deductions and take some actions that might save you money come April 15th. If you are looking to reduce your tax liability, here are a few yearend tax planning tips:
Consider Roth conversion: If you have a traditional IRAs, consider a Roth conversion. Remember, Roth conversions result in taxable income, so there are many things to consider in determining whether a Roth conversion makes sense for you, such as what tax bracket you’re in now vs. retirement, ability to pay the additional tax on conversion, years until you retire, etc. But if your 2015 income has decreased more than usual, it might make sense for you to convert. Roth conversions MUST be done by 12/31/15.
Maximize your 401(k) contributions: By maximizing this retirement contribution you reduce your taxes, as well as reducing AGI which may qualify for more deductions and credits that are subject to AGI phase-out. The maximum contribution for 2015 is $18,000 plus an additional $6,000 if you are 50 or better. The only time you can contribute to your 2015 401(k) is in 2015!
Make charitable contributions: Support causes that you believe in. Clean out your closet and donate to charity. Make sure you have the documentation, such as a receipt from the charity to support all contributions, even those under $250.
Estimate taxes due for 2015: If you think you will owe, adjust withholding accordingly, in order to avoid underpayment penalties. If you think you will get a commission, bonus or exercise stock options, please ensure that it is withheld at your regular rate, rather than the standard supplemental 25% and 6% rates for Federal and California, respectively, as this may not be sufficient if you are actually in a higher tax bracket! Also, if you pay any state taxes due you may get a Federal deduction. Also consider prepaying your April property tax installment. But beware that you are not subject to Alternative Minimum Tax (AMT).
Prepay college tuition: Think about prepaying college tuition for first term of 2016 in order to qualify for the full $4,000 subject to the American Opportunity Credit. If your AGI is under $180,000 ($90,000 if single), you may qualify for the credit of up to $2,500.
Spend your FSA: If you still expect to have funds in your Flexible Spending Account (FSA), make arrangements to have doctor checkups, elective procedures, etc. by December 31, so that you can use your FSA funds. FSA funds for each year are “use it or lose it,” unless your company has elected the $500 carryover option.
If you want to know how the above suggestions might affect you, please contact us.
