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Year-End Tax Planning: What You Need to Know

The end of 2015 will soon be upon us, and as such, it’s time to think about tax planning for year-end. There are a number of ways that taxpayers can help themselves to trim their tax bills.

If your taxable income is above 91k for single and 150k for married filing joined returns, it generally makes sense to defer income into later years and accelerate deductions into the current year.

  1. If you have the opportunity try to defer some of your income as part of a deferred compensation plan.
  2. Defer taxable using your 401K plan. Make the maximum contribution so that your current year taxable income will be lower. You’ll be saving for your future and deferring the taxable income until you retire.
  3. If you are self-employed, you can take advantage of a simplified employee pension individual retirement account (SEP IRA) to help offset your tax burden.
  4. If you are retired, keep in mind the timing of any distributions from retirement plans. Some retirement plans allow for a choice between a lump sum payout or staggered payments. You should plan this based on your anticipated income by year-end. Remember that retirement plan payouts are not considered net investment income for the purpose of the net investment income tax.
  5. Consider switching some of your funds to a Roth IRA. One major advantage of this is tax-free investment growth under certain circumstances.
  6. Realign your investment portfolio to include more tax-exempt municipal bonds.
  7. Loan money to your family. That’s right, intra-family loans are great for deferring some of your income, as you can charge the borrower a better rate of return than you would get on a traditional investment.
  8. Check into your capital losses. You can use some of your net capital losses to offset ordinary income.
  9. Give to your favorite charity. But remember, your cash contributions cannot exceed 50 percent of your adjusted gross income.
  10. Income shifting to children. This is generally an effective tax planning strategy, but you need to remember that children under 18 and students under 24 will be taxed at the higher adult rate once the income exceeds a certain threshold.

Some actions to consider in accelerating deductions are:

  1. Making state estimated tax payment in the current year.
  2. Prepaying property taxes due the following year.

Alternatively, if you expect a substantial increase in income or anticipate using a less favorable tax filing status in the next year, accelerating income into the current year or deferring deductions to the following year may be an appropriate strategy.

Actions to consider:

  1. Creating incentive for customers or clients to pay outstanding receivables in 2015.
  2. Moving up planned retirement plan distributions to the current year rather than taking them in the next year
  3. Selling gain-generating assets this year

KCH is qualified to discuss year-end tax planning and help clients makes the best decisions. Do not hesitate to contact our office at 973-586-2360 or email us (info@kchpc.com) should you have further questions or to set up a consultation.