(This article appeared previously on MarketWatch.com)
Take these steps now to avoid a tax hit in 2015:
Estimated tax includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. What do you need to pay? Either 90 percent of the tax to be shown on your 2014 tax return or 100 percent of the tax shown on your 2013 tax return.
If you figure your payments using the regular installment method and later refigure your payments because of an increase in income, you may be charged a penalty for underpayment of estimated tax for the period(s) before you changed your payments. “You’ll want to avoid underwithholding penalties and nasty surprises when you file,” said Nangle.
FYI: To learn how might be able to avoid or reduce this penalty, read the IRS documents on Annualized Income Installment Method (Schedule AI) and Estimated Taxes. Also check your tax withholding rate and adjust it upward or downward so your tax payments equal roughly what you’ll owe.
There are exceptions: Roth IRAs, for instance, don’t require withdrawals until after the death of the owner. And if you turned age 70½ in 2014, you have April 1, 2015 to take your RMD. (If you wait, by the way, you’ll have to take two RMDs in 2015.)
If you don’t take your RMD before year-end there’ll be a high tax penalty: a 50 percent tax on the amount you should have taken as well as the ordinary income tax due on the distribution.
Some tricks of the trade?
If you have multiple IRA accounts, calculate your total RMD and then take the RMD from the one that is most beneficial. “For example, this year pull from the accounts that are ‘up’ in value rather than those that have low or negative returns, for example domestic large-cap vs. foreign stocks,” said Galli.
Remember, too, that you can aggregate your IRA accounts, but employer-sponsored retirement plans cannot be aggregated with IRAs. The latter accounts must be treated separately, said Galli.
Another trick: If you’re still working after age 70½ and contributing to your current employer-sponsored 401(k) plan, you don’t have to take an RMD from that account, said Galli. You only have to take RMDs from that plan until the year that you retire.
Also consider if you have the funds to pay whatever ordinary income taxes will be due. The conversion will be consider a distribution from your IRA or 401(k). That potential downside notwithstanding, converting all or part of IRA/401(k) to a Roth IRA/401(k) gives you two big benefits: tax-free growth and tax-free withdrawals. What’s more, you can recharacterize your Roth IRA back to a traditional IRA by Oct. 15, 2015 if the conversion didn’t make financial or tax sense; if, for instance, the account declined in value or your tax bracket changed, said Obhas.
One other item: Having both traditional IRAs and Roth IRAs give you what experts refer to as tax diversification. In years to come, you’ll have the ability, if you choose, to withdraw money from whichever retirement account provides you with the most after-tax income.
If you can’t reach the max, try to contribute enough to receive your employer’s full match. A typical match is 50 cents on the dollar, up to 6 percent of your contribution. And if that’s not possible, try increasing your contribution by a little bit, even 1 percent if that’s all you can swing. “It can make a big difference come retirement” said Obhas.
Speaking of contributions, don’t forget to contribute, if you’re able, to your traditional and/or Roth IRA and your health savings account (HSA).
If you’re self-employed, Victoria Fillet, a certified financial planner with Blueprint Financial Planning in Hoboken, N.J., recommends setting up and contributing to any number of retirement plan options including a solo 401(k) or a Simplified Employee Pension (SEP) for instance. And while you’re at it, calculate whether you’re saving enough for retirement.
Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up.
One thing to watch out for: Avoid the wash sale rules, said Kelly Olson Pedersen, a certified financial planner with Caissa Wealth Strategies in Bloomington, Minn. According to the IRS, you cannot deduct losses from sales or trades of stock or securities in a wash sale, which occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale buy substantially identical stock or securities; acquire substantially identical stock or securities in a fully taxable trade; acquire a contract or option to buy substantially identical stock or securities or acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. For more information, read the IRS document, Sale of Property.
Consider harvesting your investment gains too. “Our industry loves to discuss the benefits of ‘tax-loss’ harvesting,” said Clemens. “However, many retirees can now control their taxable income, and if they are in the 15 percent marginal tax bracket, then their capital gains tax rate is 0 percent at the federal level. With domestic stock being up the past few years, it’s worth analyzing if gains can be harvested at the 0 percent rate.”
Besides giving cash to a charity, consider donating highly appreciated stock. “You won’t owe capital gains taxes and can deduct the current value of the investment as a charitable gift,” said Obhas. Obhas recommends using the IRS’ Exempt Organizations Select Check tool to make sure you’re donating to a qualified charity.
One helpful hint: Mileage primarily for medical care counts. “Those trips to the doctor and pharmacy can add up,” said Clemens.
Also, if you’re self-employed and having a good year, Fillet recommends making deductible purchases and payments now for next year.
Also, figure out when you (and your spouse) should take your benefits, said Obhas. The earliest is at age 62, the latest is age 70. After 70, your benefits no longer increase.
Your Full Retirement Age depends on the year you were born; your statement will tell you when it is. “Taking your benefit before your Full Retirement Age can limit Social Security strategies available to you and your spouse,” said Obhas. “Strategies such as spousal benefit, file and suspend, and the like should be examined.”
If you’re divorced and had been married for 10 years or more, look into the Social Security benefits available to you. One strategy, according to Obhas, is this: “You could delay taking your own benefit by taking your ex-spouse’s benefit, which is one-half of their retirement benefit. Certain restrictions apply: you must be married for 10 years or longer, you must not be currently married, and you must be age 62 or older.”
For those fortunate enough to worry about going over the exemption, here are some ways to help, said Obhas:
First, the annual exclusion gift. You can give a $14,000 gift to each individual.
Next, consider paying someone’s college tuition or medical bills. Of note: “Paying directly to the provider is the only way to do this,” said Obhas. “Doing this will reduce your estate and does not count against your annual exclusion gift. Not to mention you could really make someone’s day by helping to pay their college or medical costs.” Pedersen recommends contributing to a 529 plan to fund your children’s and/or grandchildren’s college education. One way to do this? Use your annual gift exclusion of $14,000.
“The most common oversight I see with prospective clients is when they have children from a previous marriage and have remarried and started a new family,” he said. “Their documents haven’t been updated to reflect their current marriage and leave most of the assets and decision making at death to the ex-spouse while leaving out the current spouse and children. Which needless to say, can be very problematic.”
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This article is reprinted with permission from MarketWatch.com. © 2015 Dow, Jones & Co., Inc. All Rights Reserved.