Year-end tax planning – 2015 checklist


Know your taxes! I am a big fan of the philosophy: No one cares more about your money than you do. Even if a professional prepares your taxes every year, learn to do it yourself. Aside from what you'll save in fees, here are two benefits of learning to prepare your taxes yourself:

  1. By doing your taxes on your own, you can learn quite a bit about your finances and get a lot of ideas on how to make your money work more for you.
  2. Sometimes a professional might not ask the right question because they don't know everything that went on in your life this year. If you learn to prepare your taxes yourself, you will become more aware if a professional is missing any deductions.

Educate yourself. This is an excellent place to start — IRS tax tips.

If a professional prepares your taxes…

Set up a meeting with your accountant/tax adviser.

Red string bow on finger as a reminder

If someone else does your taxes, set up a meeting with them now instead of waiting until the new year arrives. This provides two great benefits:

  1. Your adviser will have a lot more time to spend with you now than during the tax season. Meeting with your tax professional now allows them to carefully consider all scenarios and advise you on how best to structure your finances to be tax efficient.
  2. You can implement the suggested strategies right way as there are still two more months in the 2015 tax year of which to take advantage.

2015 checklist

  1. Calculate your current year's estimated income. Add up your salary, any expected bonuses and other income (from side gigs, state tax refund, etc.)
  2. Estimate next year's income. Do the above for next year. Yes, it will be a guess, but give it your best shot.
  3. Maximize your retirement contributions.
    • Are you maxing out your 401(k)? If not, can you tighten your belt for a couple months and add an extra 1 to 2 percent to your contribution?
    • Do you have an IRA? If not, can you open a Roth IRA (or traditional IRA) and fund it?
  4. If you expect your income to go up significantly next year, you might want to move up your capital gains and income to this year so you can pay lower taxes on those.
  5. If you expect your income will go down instead, it might make sense to decelerate income and move it to next year.
  6. Review opportunities for tax-loss harvesting to offset realized gains.

If you have kids…

  1. Open a 529 account to take advantage of tax savings with your state (if applicable).

Review the possibility of bunching deductions

Do a rough tax preparation and review if you can maximize the above-the-line deductions (IRA, HSA, moving expenses, self-employed health insurance, etc.).

What is bunching and how does it help?


We bunch our deductions together and itemize them every other year.  We use the standard deduction in the intervening year.

For example:
Let us assume that you file your taxes as married couple, filing jointly with no dependents. And then let us assume, further, that your mortgage deduction is $5,000 per year and you donate $5,000 to charity every year (among other deductions like medical expenses).

Standard deduction

Here's how the standard deduction works in that case:

Tax Year 2015: Your itemized deduction amount will be $10,000 (over simplifying this for illustration); and your standard deduction amount will be $12,600.

Tax Year 2016: Your itemized deduction amount will be $10,000; your standard deduction will be $12,600 (estimate).

As the standard deduction is more than itemized deductions in both years, you will take the standard deduction. Total deductions: $25,200.

Bunching scenario

Here's how the bunching scenario works in that case:

Your mortgage deduction is still $5,000 per year and you donate $10,000 to charity every other year.

Tax Year 2015: Your itemized deduction amount will be $5,000 (again, over simplifying this for illustration); and your standard deduction amount will be $12,600.

Tax Year 2016: Your itemized deduction amount will be $15,000; and your standard deduction will be $12,600 (estimate).

So in this case, you will take the standard deduction in Tax Year 2015 and itemize during Tax Year 2016. Total deductions: $27,600.

Essentially, you will have alternating lean and fat deduction years.

Pushing the bunching method further


This is a simplified example, but you can push this even further to maximize all possible deductions in Tax Year 2016.

  • Can you prepay your mortgage and push part of the $5,000 from Tax Year 2017 to Tax Year 2016?
  • Can you do the same with property taxes and/or medical expenses?

Bunching deductions in fat years and lean years

Bunching deductions not only helps you take more in deductions, but it also helps with exceeding minimums set for certain deductions.

After doing the calculations in the above point, see what action to take in a fat year versus a lean year:

 

Fat Year

 

 

Lean Year

 

 

Checklist Item

 

✔

Charitable and other deductions: Calculate your charitable contributions so far, mortgage interest, medical expenses, etc., and contribute more.

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Alternatively, if this is a lean year, you can start targeted saving accounts for each of these and start saving money you would have contributed to charity to contribute in bulk for next year.

✔

Contribute your appreciated stock to charity instead of straight-up cash. This will allow you not to pay capital gains on the appreciated stock and the charity will get the same amount of money in stock.

✔

If you are considering a big purchase like buying a car and you live in an income-tax-free state, consider buying them before the end of the year (again, if it is a fat year) to get the sales tax deduction.

✔

Postpone the purchase until 2016 if this is a lean year.

✔

If you want to maximize deductions for this year, pay college costs early.

✔

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If you have a Flexible Spending Account, plan to spend the entire amount before you lose it at the end of the year.

✔

If you have a Health Savings Account, you can increase the contributions to take the maximum deductions for this year.

✔

If you have lower income this year, talk to your financial adviser to see if it makes sense to convert part of your nest egg to a Roth IRA.

Miscellaneous checklist items

  1. If you are above 70 ½, take your required minimum distributions.
  2. Beware of the Alternate Minimum Tax (AMT). It was created for the rich; but by not keeping up with inflation, the AMT has been hitting more and more middle class families. Check if you will be hit with the AMT. That changes the deduction landscape quite a bit and will need a different plan.
  3. Adjust your withholding. There is enough time to adjust your withholding if you find that you have not paid enough taxes for this year. You can either estimate the taxes and adjust your withholding or pay 100 percent of your last year's tax liability (110 percent if your adjusted gross income, or AGI, will be more than $150,000) and avoid a penalty.

Plan for the future

The following items are not directly related with the 2015 year-end tax planning but will help with 2016 tax planning and make it a lot easier.

  • Start a filing system to keep all your deductions/receipts organized and easy to find.
  • Based on the amount you spent this year on medical expenses, review your current health insurance and see if there is a better option that meets your need when the open enrollment rolls in.
  • Adjust your HSA/FSA amount for next year.
  • Adjust your withholding for the year 2016 so that you don't overpay or underpay.

What's on your tax preparation checklist this year?

More about...Planning, Taxes

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My Factoring Network
My Factoring Network
4 years ago

Tax savings and financial planning is a task which every one should know. There are many tax saving tricks which are not evident and normal people do not know. The check-list is helpful for all of us. Thanks for sharing.

Ariel
Ariel
4 years ago

So many think of taxes once the new year rolls around, it’s great that you posted an early reminder. I organize my tax paperwork year round. Doing my own taxes has taught me so much that I never knew when I took the standard deduction. Itemizing is a whole new ball game!

Leslie Van Zee
Leslie Van Zee
4 years ago

This is great, I love the year-by-year breakdown for bunching the tax deductions.
One more item that is good to get ready before the end of the year is to prepare for forms associated with hiring independent contractors, such as housecleaners, nannies, and landscapers. For anyone you pay more than $600 per year to, you’ll need to have them complete a Form W-9 form (you only need to request this every 4 years). Then, you’ll need to send them a Form 1099-MISC by January 31st and mail to the IRS by February 28 (March 31 if you file electronically). https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-and-Associated-Taxes-for-Independent-Contractors

CT
CT
4 years ago

Paying mortgage interest before it is due is not deductible until the tax year it is due. Same with property taxes. Maybe the better advice is to know how to calculate taxes, but talk to a professional about the legality/ethical basis for your tax-saving strategies.

Suba
Suba
4 years ago

CT, that is why I said it is oversimplified. It is not illegal. If your mortgage is due on the 15th of every month. And you pay it on the 30, it does count as within due date, you are not prepaying anything, just working the dates differently. Same with property taxes. There is nothing wrong or unethical about it. Talking to a professional is a good idea nevertheless.

Nathan
Nathan
4 years ago

I never really get to do my own tax by myself. Thank you for sharing this is very helpful. Have one question though about online income. All income are taxable right? what about income from online trading? It’s been months now since I started online trading. I started with a modest amount ($100) and now I am earning roughly about $5000 monthly. My broker Eclipse-Finance.com is an offshore broker (london based). Had my account managed from Top-binary-signals.com which has 50/50 profit sharing (german based company). I am not sure how much tax I should be paying.

MJ
MJ
4 years ago

I would like some advices on the US tax, as I have just moved my famliy from the UK to the US, and getting set up with all that comes home, car, health care etc.
will I be taxed for the full year of 2015 if I moved at the end of June 2015.

Any advices would be great,
thanks in advance

Brian Setzler, CPA
Brian Setzler, CPA
4 years ago
Reply to  MJ

MJ, That’s a very good question though not easily answered due to the tax complexities related to foreign individuals and income. You may be able to prepare your own US taxes if they are on the easy side, but you may want to enlist a professional, especially for the first year. Let me give you the good news, you won’t be taxed twice on the income (In the UK and the USA). If you are a UK citizen, I’d recommend you read the USA/UK Tax Treaty to familiarize yourself with some of the special nuances that might be relevant to… Read more »

Another Beth
Another Beth
4 years ago

I like having a filing system in place and I am trying to get my husband on board. My plan every year is to buy a new accordion file in January, then file things in the appropriate slot as they arrive. It’s no fun to look for a receipt you got for donating items to a thrift store months and months ago!

RAnn
RAnn
4 years ago

I am constantly amazed at the number of people who pay good money to have someone else with little more knowledge than they have type numbers in a computer. I think everyone should at least try to do their own taxes at least once. All the major sites let you do simple federal returns for free. If you get stuck; if there is a problem, see a pro (not the low-wage workers at H&R Block et al

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