Year-End Tax Savings
By Allie Schmidt, CFP®, CPA
It’s Thanksgiving and everyone is already getting into the giving spirit. Pretty soon the Salvation Army Bell Ringers will be in front of every store. There is almost a sense of generosity in the air this time of year. However, no matter how generous you are with family or those in need, being generous with Uncle Sam is something we’re all trying to avoid. I hear from a lot of people asking how to reduce their taxes beyond just contributing to an IRA, 401k, or HSA, which are all great places to start. But, depending on your situation, there may be more tax saving strategies you should consider as we bring 2015 to a close.
Scenario: You own a business with no employees and have income greater than $25,000.
Consider setting up a SEP IRA. You’re allowed to contribute up to 25% of compensation or $53,000 (2015 limit per IRS.gov), whichever is lower. This will allow you to defer more income than you could to a Traditional IRA ($5,500, 2015 limit) to reduce current taxable income and allow increased funds to grow tax-deferred.
Scenario: You are charitably inclined and had an unusual increase in income this year, maybe from exercising stock options, selling a property, or a large short-term gain. Consider establishing a Donor Advised Fund (DAF). With a DAF, an individual establishes the fund and is able to make charitable contributions to the fund in the current year and receive the full charitable deduction in that year. The funds can be invested and stay in the DAF, then you can send funds to different charities over the years. So, let’s assume you would like to reduce income this year and regularly give $5,000 to the National MS Society each year. You’re able to make a lump sum contribution, say $50,000 in 2015, receive the charitable donation deduction of $50,000 in 2015, reducing taxable income. Then give the National MS Society $5,000 each year for the next 10 years. This is applicable for any charity of your choice, and for any amount you’d like with a minimum $250 per contribution.
Scenario: You have a traditional IRA or “old 401k” and this year is a lower income year for you and your family— maybe you’ve just retired and haven’t yet started receiving social security or pension income or you took some time off from work this year. Basically, this year you have lower income than likely future years will be. Consider doing a Roth Conversion with a portion of your Traditional IRA. You do have to pay the income tax on the amount converted today; however, you may be able to take advantage of the lower tax bracket you’re in today compared to your future tax bracket once income increases. The amount that is converted will then be able to grow tax-free, also creating a potential opportunity to manage your taxable income in retirement by supplementing taxable income with your Roth assets.
Each of these strategies has to be established/completed by December 31st of this year and are very specific to your personal situation. However, if there’s a chance to pay “the man” a little less, be sure to let us know and we’ll get it done. Happy Holidays!
Any opinions are those of Allison Schmidt and Steven Higgins and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Please consult with your financial professional about your individual situation. Investing involves risk and investors may incur a profit or a loss. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
