As we get closer to the end of yet another year, it’s time to tie up the loose ends and implement tax-saving strategies.
Of course, everyone has a unique tax situation, but here are some strategies to add to your year-end tax planning arsenal:
• Boost charitable contributions with a donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations. With donor-advised funds, which are available through a number of major mutual fund companies, as well as universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice. The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. Donor-advised funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.
• Make sure you have adequate health insurance coverage. If you and your family don’t have adequate medical coverage (referred to as minimum essential coverage), you may be subject to a penalty. Medical insurance provided by your employer or through an individual plan purchased through a state insurance marketplace generally qualifies for adequate coverage. The penalty amount varies based on the number of uninsured members of your household and your household income. If you have three or more uninsured household members, the penalty may be $975 or more for 2015 ($2,085 or more for 2016), depending on your household income.
• Harvest capital losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date.
• Increase capital losses with a bond swap. Bond swaps can be an effective means of generating capital losses. With a bond swap, you start with a bond or bond fund that has decreased in value (for example, due to an increase in interest rates or a lowering of the issuer’s creditworthiness). You sell the bond or fund shares and immediately reinvest in a similar (but not substantially identical) bond or bond fund. The end result is that you recognize a taxable loss and still hold a bond or shares in a bond fund that pays you similar or more interest than before.
• Secure a loss deduction for nearly worthless securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules capital loss and wash sale rules).
Through careful planning, it’s possible your 2015 tax liability can be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction.
Don't Delay! There is still time to implement year-end tax strategies. Contact us today!