Your 2015 tax return isn’t due until April of 2016, but now is the time to consider your options for tax planning. Many of the tax-savings moves you can make for your 2015 return need to occur before the end of the year. Here are answers to questions you may have about tax planning strategies in the weeks ahead:
Are there investment moves I should consider making before the end of the year?
It is important to know what your tax considerations are before making any moves. For example, many investors worry about capital gains. One effective tax-saving strategy is to offset any capital gains you might realize in your portfolio with capital losses. If you have investment holdings that are worth less than what you paid for them, you could consider selling those positions and realizing a capital loss, particularly as a way to offset capital gains. This strategy may be appropriate for taxpayers who may have capital gains that are subject to taxation.
Keep in mind that if you are in the 10 percent or 15 percent tax bracket, you qualify for a zero percent federal tax rate on long-term capital gains and qualified dividends, significant tax savings. In this case, “harvesting” capital losses is not a beneficial strategy. Before selling assets, make sure the move is consistent with your long-term investment strategy. Keep in mind that one of the biggest tax benefits is maintaining unrealized capital gains—growth in an investment that you continue to hold. Gains are only taxable when you sell an investment.
How about the tax implications of investments I own or am considering?
In general, there are many tax implications when it comes to investments. Let’s take a deeper look into mutual funds. There are different tax considerations with mutual funds because you are subject to distributions made by the fund that are taxable. It is possible that fund positions you own may pay out a significant distribution before the end of the year, even though the fund itself may have a negative return for the year. Check to see the status of potential distributions of any fund you own. Keep in mind that this tax treatment doesn’t apply to funds held in tax-deferred vehicles like a 401(k) or IRA.
Are there steps I can take to reduce taxes on my income?
If you have the ability to manage your income, you may want to pay attention to whether your income level is closing in on a threshold point that moves you into a higher tax bracket. For example, a married couple filing a joint return in 2015 with taxable income above $74,900 (after deductions and personal exemptions) would be in the 25 percent tax bracket. That doesn’t mean all income is subject to a 25 percent tax rate, as income is taxed in steps (everything under $74,900 would be taxed at a 15 percent rate or less). But by reaching the 25 percent tax bracket, any net long-term capital gains realized would be subject to a 15 percent tax at the federal level.
By keeping income (including any gains) below $74,900, a married couple remains in the 15 percent tax bracket, qualifying them for a zero percent long-term capital gains tax rate. Finding ways to keep income under thresholds can be important for different reasons for people with varying income levels.
Are there ways to cut taxes by increasing my savings to retirement plans?
Any pre-tax contributions to workplace savings plans or tax-deductible contributions to IRAs (if you qualify based on your income) can reduce your taxable income in 2015. You should also consider making contributions to a Roth IRA if you qualify, as this has the potential to create a source of tax-free income for retirement. Although Roth contributions cannot be deducted from current taxes, it is important to make them annually as contribution amounts are limited. In 2015, you can contribute up to $5,500 to an IRA ($6,500 for those age 50 and older). You have until April 15, 2016, to make IRA contributions for 2015.
When should I make charitable donations?
Your favorite charities would likely prefer any gifts to be made as soon as possible. To claim deductions on your 2015 tax return, donations must be made by Dec. 31, 2015. Keep in mind that to claim a charitable deduction, you need to itemize deductions and have a written record, either a bank statement or a receipt from the charity.
It’s important to note that the information provided in this article is a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the needs of an individual investor. Please seek the advice of a financial advisor regarding your financial concerns. Also, before making any decisions that may affect your 2015 tax return, be sure to consult your tax advisor or attorney regarding specific tax issues.
William “Drew” Watson CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact us by phone, please call 270-684-8424, or mail to 111 West 3rd St., Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.).