Preparing for Year-End Tax Planning

Year-end tax planning may be especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2014. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).

For individuals, these tax breaks include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes
• the above-the-line-deduction for qualified higher education expenses
• tax-free IRA distributions for charitable purposes by those age 70-1/2 or older

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include:

• 50% bonus first year depreciation for most new machinery, equipment and software
• the $500,000 annual expensing limitation
• the research tax credit

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

Year-End Tax Planning Moves for Individuals

• Realize Losses on Stock while Preserving Investment Position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
• Minimize Surtax for Certain Net Investment Income (NII) above Set Threshold Amounts. The threshold is $250,000 of modified adjusted gross income (MAGI) for married couples filing jointly and $200,000 for single filers. To minimize the 3.8% surtax, you should consider deferring NII or reducing your MAGI.
• Postpone Income until 2016 and Accelerate Deductions into 2015 for Lower 2015 Tax Bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI), including child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income is also desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
• Convert from Traditional to Roth IRA. If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2015.
• Convert from Roth to Traditional IRA. If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion – that is, by transferring the converted amount from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer.
• Estimate the Effect of Year-End Planning Moves on the Alternative Minimum Tax (AMT). Keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions.
• Bundle Miscellaneous Deductions. You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
• If 70½ or Older, Take Required Minimum Distributions (RMDs) from Your IRA or 401(k) Plan. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70½ in 2015, you can delay the first required distribution to 2016. However, this will mean taking a double distribution in 2016, the amount required for 2015 plus the amount required for 2016, and possibly pushing you into a higher tax bracket. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
• Gift before Year-End. Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2015 to each of an unlimited number of individuals but you cannot carry over unused exclusions from one year to the next.

These are just some of the year-end steps that can be taken to save taxes. Please contact your Coldstream relationship manager or client service team with how these strategies may impact you.

BY VINCE LEE, Relationship Mgr. & Dir. of Wealth Planning