Planning ahead for the 2016 tax season
Compared to previous years, 2015 has been relatively quiet regarding tax law changes. Congress saw fit to extend a handful of tax breaks that threatened to expire annually in years past, but there are no significant changes to complicate the tax filing process. When it comes to taxes, it always pays to plan ahead, so here are three specific things you can do before the end of the year to make filing your taxes next spring just a little bit easier.
- Avoid Sticker Shock
People who wait for their tax reporting forms from mutual fund or investment managers are often shocked at the dividend and capital gain distribution numbers and the accompanying tax bill. The result of waiting can be the pleasure of writing a larger-than-expected check to the IRS and, in some instances, a penalty for underpayment of taxes during the year. It is possible to reduce much of the surprise that surrounds these numbers. Mutual fund companies begin releasing information about capital gain distributions during the 4th quarter of each year. For those who own portfolios containing multiple mutual funds with gains or losses from trading activity, make a brief appointment with your Advisor to go over year-to-date dividend and capital gains distributions, and estimates for additional distributions through the end of the year. By gathering this information before year’s end, you’ll have more time to save up or gather resources for a larger-than-usual tax bill and be better prepared to make an estimated tax payment for the 4th quarter of the year to avoid a penalty for underpayment.
- Fix IRA Contributions
Many people contribute regularly to a Roth IRA during the year only to find out at tax time that their income caused them to be ineligible for a Roth IRA contribution. In 2015, married couples filing jointly are eligible for a Roth IRA contribution until their adjusted gross income hits $183,000. At that point, the annual contribution limit starts diminishing until it phases out completely when adjusted gross income hits $193,000 (for single filers, the contribution starts phasing out at $116,000 and is eliminated completely at $131,000). Waiting until tax filing time to discover that you are ineligible for a Roth creates an opportunity to reverse those contributions and potentially redirect them to a Traditional IRA. From there, you can consider other IRA strategies with your Advisor. There is nothing wrong with waiting until tax time because the IRS is generous in its timeframe for fixing misdirected IRA contributions, but doing it prior to the end of the year reduces the hassle factor of an already stressful tax filing season.
- Procrastinate (in this one case, it may pay off!)
If you are over age 70½ and have an annual charitable giving commitment, it pays to wait for Congress to continue their habit of extending the qualified charitable distribution (QCD) privilege to IRAs. The Senate has extended this distribution option and we are waiting for the House of Representatives to do the same. The QCD rules allow an IRA distribution to be sent straight to a charity and not be included as income to the IRA owner. This feature is incredibly beneficial because it allows that charitable distribution to satisfy the annual required minimum distribution rules. Normally, it is better not to wait until the last minute to take a required minimum distribution, but for the charitably minded, it might pay to wait until December to see if the QCD option is available.
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