Tax planning is a year-round endeavor, but there are numerous year-end strategies that might reduce your 2015 tax bill. As we approach the gift-giving season, we would like to provide a few ideas that may provide tax saving gifts to you.
Health Savings Accounts (H.S.A.)
You may be eligible to fund an H.S.A. account if you have a high-deductible health plan (HDHP). An H.S.A. is a separate account that is used to pay for out-of-pocket medical expenses. When you contribute into the account, the contributions are pre-tax or tax-deductible up to certain limits. For a family plan, the contribution limit for 2015 is $6,650. Funds can grow tax-free in the account, and the disbursements are tax-free when used for medical expenses. For certain taxpayers, utilizing an H.S.A. can save around $3,500 per year in taxes. You will need to check with your benefit administrator to determine if you are eligible.
You may need to increase your 2015 401K deferrals. If you are employed and are not contributing the maximum annual amount to your particular employer’s retirement plan, we encourage you to make that one of your primary goals. Not only does this go a long way towards meeting your retirement goals, but it can save you thousands in taxes every year. The maximum annual deferral for employees under age 50 is $18,000. If you are 50 or older on December 31, you can defer an additional $6,000 for a total annual deferral of $24,000.
Qualified Retirement Plans
If you own your business and it doesn’t already have a retirement plan in place, we recommend that you consider implementing some type of plan as soon as possible. There are numerous employer-based qualified retirement plans to choose from. Each type has different limits, criteria, deadlines, and other aspects, but all have the common goal of sheltering income from taxes.
Dependent Care Assistance Programs
Many taxpayers are aware of the child and dependent care credit claimed by filing Form 2441. For higher income taxpayers, this credit’s benefit is limited to $600 for one child or $1,200 for two or more children. However, many taxpayers are unaware of the option to pay for these costs using pre-tax dollars if your employer offers this option. You can exclude up to the first $5,000 of wages by allocating them to this plan. The plan then pays your child/dependent’s care provider directly. For a taxpayer in an upper tax bracket with one child, the additional tax savings by using this plan instead of the tax credit can be over $1,000.
Capital Gains/Losses Planning
The tax rate on long-term capital gains can be 0 percent, 15 percent, 20 percent, 25 percent, or 28 percent, depending on your taxable income. In addition, you may be subject to an additional 3.8 percent net investment income tax on this same income. Because of this, proper tax planning becomes more valuable. In certain situations, harvesting losses by selling a security that has decreased in value, then purchasing the same security at least 31 days later can be beneficial.
Donations to Charity
Making charitable donations before year end can reduce your 2015 tax bill. An effective strategy is to donate appreciated stock owned for more than one year. That way, you’ll enjoy a charitable tax deduction for the security’s full market value (subject to certain limitations), while avoiding capital gains tax and the net investment income tax on its appreciated value. Or, if you’re considering donating securities that have lost value, you’re better off selling them and donating the cash to the charity. Otherwise, you’ll miss out on the chance to deduct the capital loss.
Avoid Estimated Tax Penalties
If you’re behind on estimated tax payments, you may be able to catch up and avoid penalties on your 2015 return by increasing withholdings on your remaining wages and retirement distributions – or, if you file jointly, on your spouse’s remaining wages – for the year. Unlike estimated tax payments, taxes withheld from wages are treated as if they were paid throughout the year, regardless of when they’re actually withheld.
These are just a few tips that you may be able to implement in order to lower your 2015 income taxes. You also want to be thinking of 2016 opportunities because the best tax planning is year-round tax planning. Every individual’s tax situation is different.
These strategies have very specific rules that must be followed, so please discuss these items with your tax preparer before implementing. It is extremely important that you are aware of these and other tax saving measures as they can keep thousands more in your pocket each and every year.
Porter Roberts, Jr., CPA, and Matthew S. Smith, CPA, CFE, are with the Medical Services Group of Barr, Anderson & Roberts, PSC in Lexington, KY. If you would like more information, they can be reached via email at firstname.lastname@example.org and email@example.com and via telephone at 859-268-1040.