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Year-End Tax Planning Tips

Jose Diaz Caro

Just as the daylight hours are getting shorter, so is the time for fine tuning any last-minute strategies to lower your 2015 tax bill. While year-end legislation extending certain expired tax benefits may still come to pass and be of benefit to you, there are other options we should explore for potentially lowering your taxes. Often, the correct steps to take will depend on whether you see your income going up or down next year.

American Opportunity Credit

If you, your spouse, or a dependent incurred qualified education expenses to attend an accredited postsecondary institution (e.g., a college or university), you may be eligible for the American Opportunity Credit. The maximum annual credit is $2,500 per eligible student. Expenses which qualify for the credit include tuition and fees required for the enrollment or attendance at an eligible educational institution. For taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint filers), the amount of the credit is phased out. The credit is not available for married taxpayers filing separately.

Obamacare Considerations

Under Obamacare, there is a penalty, known as the "shared responsibility payment," for not having health insurance coverage. You may be liable for this penalty if you didn't have health insurance for two or more months in 2015. However, depending on your income, you may be eligible for an exemption from the penalty. The penalty is 2 percent of your 2015 income or $325 per adult, whichever is higher, and $162.50 per uninsured dependent under 18, up to $975 total per family.

Accelerating Income into 2015

Depending on your projected income for 2016, it may make sense to accelerate income into 2015 if you expect 2016 income to be significantly higher. Options for accelerating income include:

(1) harvesting gains from your investment portfolio, but keeping in mind the 3.8 investment income tax;

(2) as previously mentioned, converting a retirement account into a Roth IRA and recognizing the conversion income this year;

(3) taking IRA distributions this year rather than next year;

(4) if you are self-employed with receivables on hand, trying to get clients or customers to pay before year end; and

(6) settling lawsuits or insurance claims that will generate income this year.

Deferring Income into 2016

There are also scenarios (for example, if you think that your income will decrease substantially next year) in which it might make sense to defer income into 2016 or later years. Some options for deferring income include:

(1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2016;

(2) if you are considering selling assets that will generate a gain, postponing the sale until 2016;

(3) delaying the exercise of any stock options you may have;

(4) if you are selling property, considering an installment sale; and

(5) parking investments in deferred annuities.

Deferring Deductions into 2016

If you anticipate a substantial increase in taxable income, we may want to explore pushing deductions into 2016 by looking at the following:

(1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and

(2) postponing the sale of any loss-generating property.

Accelerating Deductions into 2015

If you expect your income to decrease next year, accelerating deductions into the current year can offset the higher income this year. Some options include:

(1) prepaying your property taxes in December;

(2) making your January mortgage payment in December;

(3) if you owe state income taxes, making up any shortfall in December rather than waiting until your return is due;

(4) since medical expenses are deductible only to the extent they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), bunching large medical bills not covered by insurance into one year to help overcome this threshold;

(5) making any large charitable contributions in 2015, rather than 2016;

(6) selling some or all of your loss stocks; and

(7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

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