On Year-End Tax Planning

by Daryl Dagit, Savant Capital Management

Making effective year-end tax decisions requires an understanding of the rules that are in effect for 2015 and 2016. Here are a few tax-planning tips that could potentially lower your taxable income, and therefore, your tax bill:

  • Retirement savings. In 2015, individuals in an employer-sponsored retirement plan can deduct contributions up to $18,000 ($24,000 if age 50 and over). A good strategy is to max out these contributions and take full advantage of any matching contributions. Make the maximum allowable contribution to an IRA. You have until April 15, 2016 to fund your IRA contribution for the 2015 tax year.
  • Health insurance. During this time of year, many have the option to enroll in a flexible spending account (FSA) or health savings account (HSA). Both of these allow individuals to save on a pre-tax basis for current and future health costs. FSAs allow individuals to save up to $2,550 on a pre-tax basis. HSAs allow for $3,350 in pre-tax savings for an individual and $6,650 for those married filing jointly. There is a $1,000 catch-up for those 55 or older.
  • Dependent care. You can defer up to $2,550 ($5,100 for a married couple) into a dependent care FSA, which reimburses you for qualifying expenses related to the care of eligible individuals. This includes day care, nursery school, day camp, babysitters, before/after school programs, and caregiver expenses for disabled individuals who live with you.
  • Investment income. Review your year-to-date capital gains or losses and unrealized gains or losses in your taxable investment accounts. When to take capital gains depends on your income situation. If your combined taxable income is below the 25-percent tax bracket, capital gains will not be taxed at the federal level. Taxable income at or above the 25-percent tax bracket but below the 39.6-percent tax bracket will receive a favorable tax rate of only 15 percent. So plan ahead. If your income is expected to be lower next year, wait to take capital gains from the sale of investments. Expecting to sell a business or other capital asset at a loss this year? Taking capital gains from your investment portfolio now would allow you to offset the gain against those losses. Be aware of mutual funds that pay out large capital gains in December. Check with your advisor in late November to see if your funds are subject to this payout.
  • Itemized deductions. Itemized deductions such as state income taxes paid, real estate taxes, mortgage interest, charitable contributions, medical expenses and investment fees can make a significant dent in taxable income. You are allowed the greater of your itemized deductions or the standard deduction ($12,600 married filing jointly or $6,300 single or married filing separately) to help reduce your income.
  • Charitable donations. Be philanthropic and keep track of your cash and non-cash donations. Have a significant income year? Front-load a donor advised fund (DAF), which allows you to take a charitable deduction in the current year while spreading out the payments to qualified charities over several years. You can also mail or charge a donation on December 31st, make your January house payment before December 31st, and pay your January quarterly tax payment early.

These are just a few ideas that may help as we approach year-end. As Albert Einstein stated, “The hardest thing in the world to understand is the income tax.” So don’t feel bad if you need to seek the assistance of a financial professional to help you develop your own year-end tax planning strategies. iBi

Daryl Dagit CFP, CRPS is the market manager and financial advisor in the Peoria office of Savant Capital Management. He can be reached at (309) 693-0300.