Tax Time Again! End of Year Tax-Smart Moves

Let’s face it.  We all dread tax time.  For many of us, we really don’t have any idea how our tax situation is going to turn out until we actually finish and file our tax returns.  Wouldn’t it be great if we had a magic mirror to tell us what our tax situation is going to be BEFORE April 15th? 

One of the easiest techniques to see into the future is to,  prep your tax return before the end of the year.  I know, it’s like going to the dentist.  I’m asking you to subject yourself to something you don’t like to do, but, believe me, you’ll be financially better off if you do. 

Here are a couple things to look out for when you go through this exercise:

1)      One-time events – Did you, or are you planning to,  sell a business or rental property this year?  What will the impact be to your return? 

A.    Will you be realizing a big gain?  If so, what actions can you take before the end of this year to help mitigate the gain?  Maybe it would make sense to realize some losses somewhere else, like in your taxable investment account? 

B.     If you are going to report a big loss, maybe you should put those losses to work for you.  Consider selling some appreciated assets and harvest the gains (without having to pay taxes) in that investment account to help offset the losses.

C.     Would it make sense to wait until next year to do it?  Is it possible to split the sale into two installments to reduce your tax burden each year – and possibly stay in lower tax brackets?  Things to think about.

2)      High itemized deductions – Did you experience higher than normal medical expenses this year?  Did you make a sizeable charitable contribution?  You may find that your taxable income is much lower than you thought – so maybe now is a good time to realize capital gains you had been holding. 

3)      Business income/losses - If you are self-employed and anticipate a ‘big year’ in 2015 (yay for you!), do you really want to pay a big hunk to Uncle Sam?  Instead, would it make sense to set up some kind of self-employed retirement plan to shelter some of the income from current taxation?  Do you expect this level of income to continue?  If so it may be worth setting up a solo 401k plan which offers substantially higher contribution levels (possibly up to $53,000!) than an IRA or a SEP.

4)      Low income year:

A.    Perhaps you retired in late 2014 or early 2015, and maybe haven’t begun drawing on your taxable income streams, like pensions and Social Security. You may have a wonderful opportunity to pull funds out of your IRA with little to no income tax.  Alternatively, this may be the time to look at doing a Roth conversion.

B.     If taking money out of the IRA doesn’t appeal, perhaps you would benefit from harvesting gains in your taxable investment account at 0% capital gains tax.  Those who find themselves in the 0-15% marginal tax brackets are able to realize long term capital gains at 0% this year.

C.     If at all possible – never, ever have a “zero income” year.  Sometimes we see this with people who have just retired, and are living off their savings accounts before drawing money from IRA’s pensions, or Social Security.  Chances are, if you do the math, you are actually “negative income” after deductions – and you can never get that year back.  At least pull enough money out of your IRA to get to a very low taxable income level.  Otherwise, later on down the road, the taxes will be higher on your withdrawals and your lifetime tax burden ends up being higher.

As you can see, a little time and effort before the end of 2015 could offer up some great tax mitigation opportunities.  Go on, give it a try!   

KRISTINE D’ESTERHAZY, CFP®, ChSNC(TM), is a Client Service Advisor for Paragon Wealth Strategies, LLC.  Please see her bio here.


Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific planning strategy, investment, or investment strategy (including those undertaken or recommended by PARAGON Wealth Strategies, LLC), will be profitable or equal any historical performance level(s).  PARAGON and its advisors are neither attorneys nor accountants.  Please consult a financial advisor or your CPA for information specific to your personal situation.  For additional disclosures please click here: Disclosures