Year End Tax Planning
by Elizabeth Q. Boehmcke, Esq.
It is hard to believe that another year is almost over. But before you spend too much time on holiday cheer, take the time to give yourself a year-end financial review and determine whether there are any steps you can or should take now to reduce your exposure to taxes for the year.
- Income Tax Deductions: If you itemize your deductions on your income tax return rather than take the standard deduction, you should review your available deductions for the year and determine whether they are in line with your expectations and your income. In an ideal world, you would be able to time your deductions to meet your income. However, this is not an ideal world and it may not be possible, for instance, to control when your medical expenses are incurred. However, it is possible to control when you recognize your deduction for gifts to charities. If you want to increase your deductions for this tax year, plan to make your gifts before the end of 2015; on the other hand, if you have already been generous and are contemplating making another charitable gift, consider delaying the gift until January, 2016 to get a jump-start on next year’s deductions. Keep in mind that you can also make a gift of appreciated stock or other property to a charity instead of cash (so long as you have held the asset more than a year) and neither you nor the charity have to pay the capital gains tax on the appreciation. The key to this planning is having an understanding of whether your income is expected to increase, decrease or remain steady from this year to the next. If your income is going to increase next year, deferral may be more beneficial. If your income is expected to decrease, then it may be more beneficial to take the extra deduction this year.
- Minimum Required Distributions: Now is the time to double check with your retirement account custodian to ensure that you have taken your required minimum distribution (RMD) for the year. If you are 70 1/2 or older, you are required to make withdrawals from your qualified retirement accounts in amounts determined by your age and the amounts in your retirement accounts. The custodian of your retirement account may help you determine the amount of your RMD or you may need to do this yourself using the IRS tables. Except for the year in which you turn 70 1/2, your RMD must be distributed to you no later than December 31 (the first year the payment can be delayed until April 1 of the year following the year in which you turn 70 1/2). You will have a RMD for each retirement account you own. Failure to take the RMD on time will lead to a penalty of 50% of the amount that is not withdrawn.
- Capital Losses: If you have realized any capital gains this year, it is time to speak with your investment advisor to determine whether there are any capital losses that you can take to offset those gains. Capital losses in excess of your gains can be utilized to offset other income as well, up to $3,000. And losses in excess of $3,000 can be carried forward until fully utilized or until your death, whichever comes first.
- 529 Plan Contributions: Many states, including Virginia, provide income tax deductions for contributions to 529 Plans. If you are the owner of a 529 plan for your children or grandchildren, Virginia allows a deduction for contributions up to $4,000 per account per year with unlimited carry forwards to future tax years. This means that if you create and fund a 529 plan in Year 1 with $12,000, you may deduct $4,000 from your taxes in each of Year 1-3. If you are at least 70 years of age, the entire amount of the contribution is deductible in Year 1. Virginia’s 529 plans do have deadlines for receipts of contributions to count for 2015 that are usually a few days prior to December 31. Check their website for details: www.virginia529.com.
- Retirement Accounts: If you are still working, check to make sure you have fully funded your company’s 401k plan, at least up to the maximum company match, if there is one. If you can afford it, the maximum contribution allowed to a 401k plan is $18,000 (or $24,000 if you are age 50 or over). If you are not eligible for a 401k plan (or even if you are), think about funding an IRA or a Roth IRA. These accounts can be funded until April 15, 2016 to have a contribution for 2015 which allows you and your accountant time to determine whether you qualify to fund a Roth IRA and whether your contributions will be deductible (there are income phase out rules). The maximum amount you can contribute is $5,500 (or $6,500 if you are 50 or older).
- Annual Gift Tax Exclusion: Finally, although fewer people are affected by the federal estate and gift tax regime in this country since the lifetime exemption amount is $5.43 million per person for 2015, there are still reasons to be aware of and take advantage of your annual gift tax exclusion. For 2015, you can make gifts up to $14,000 per person per recipient ($28,000 for a married couple). These gifts are not includible in the recipient’s income and no gift tax return needs to be filed. For larger gifts, a gift tax return will need to be filed, but it is unlikely that any tax will need to be paid. Additionally, direct payment of tuition and medical expenses to a provider of those services for a loved one is not a gift, regardless of the amount, for federal estate and gift tax purposes. Again, no return need be filed. However, it is important to keep in mind that when making a gift of appreciated property (such as stock or real property), the recipient takes the donor’s basis in the property. If the recipient is in a higher income tax bracket than the donor, it may make sense to sell the property and then gift the net proceeds.
Time spent in a comprehensive year-end review of your tax planning will be time well spent. In addition to giving you the chance to focus on last minute strategies to reduce your income taxes, it will also be a good start on organizing yourself for the preparation of your income tax returns this spring. April 15th will be here before you know it!
Ask Kit Kat – Squirrels on the Upswing
Hook Law Center: Kit Kat, what can you tell us about the Delmarva Peninsula fox squirrel?
Kit Kat: Well, this is a great story about the success of the Endangered Species Preservation Act. In 1967, the Delmarva Peninsula fox squirrel’s numbers had been reduced about 90% due to development and clearing of their habitat. This type of squirrel was one of the first 78 species to be placed on the new program’s list. The Delmarva Peninsula fox squirrel is grey, but it is much larger than the average suburban squirrel, and it prefers rural settings. At year’s end, it will be removed from the Endangered Species List. Fortunately, Delaware and Virginia will continue to protect it as if it were still endangered. Maryland is thinking about reclassifying it as a “Species in Need of Conservation.”
Although the process took 48 years, it’s a testament to the skill of the US Fish and Wildlife Service, who implemented the ban on hunting and the plan for replenishment, in helping the species rebound. The core of their strategy was to relocate Delmarva Peninsula fox squirrels from areas of plenty to areas where they were scarce. Now, they estimate that there are about 20,000 Delmarva Peninsula fox squirrels throughout those 3 states. The US Fish and Wildlife Service also received help and support from individuals who own large tracts of land in the 3 states. Private landowners were invaluable in the protection of the species, which prefers isolated, large areas to inhabit.
So let’s celebrate! The Delmarva Peninsula fox squirrel and we the public have much to be thankful for! (Rachel Feltman, reprinted from the Washington Post to The Virginian-Pilot, “This was one of the 1st endangered species, but not for much longer,” November 18, 2015, p 8)
- December 3rd, 2015 – Shannon Laymon-Pecoraro will be presenting on Veteran’s Aid & Attendance Benefits at the Crowne Plaza in Virginia Beach located on 4453 Bonney Road.
- January – Our January seminars are being planned and will be up shortly.
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