Tax season can be overwhelming for even the savviest investors. In an effort to help our investors better navigate the pitfalls, we put together a checklist of useful tips and considerations to keep in mind as 2016 approaches.
1. Be Aware of 2015 Estate and Gift Tax Limits
In 2015, the amount you can leave to heirs without having to pay federal estate tax is $5.43M. Assuming a couple hasn’t made prior lifetime gifts, the couple will be able to give away $10.86M tax-free in 2015. The annual gift tax exclusion is again $14,000 to each of an unlimited number of individuals.
2. Consider an In-Kind Transfer of Traditional IRA Investments into a Roth IRA
Contributions and earnings in a Roth IRA can grow tax-free. Also note that the 2015 contribution limit for the Roth IRA is up to $5,500 if you’re under the age of 50, or $6,500 if you’re 50 or older.
3. Harvest Losses
You may offset capital gains by selling off capital losses. However, beware of the wash sale rule—if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days, the loss is typically disallowed for current income tax purposes.
4. Take Advantage of the Section 529 College Savings Plan
The 529 Plan is a tax-advantaged investment vehicle specifically created to promote savings for qualified higher education expenses. You may contribute up to $70,000 ($140,000 for a married couple) per beneficiary in a single year without being subject to the federal gift tax. Withdrawals from a 529 account can be made at any time as long as the funds are used for qualified higher education expenses.
5. Donate to Charity
Assuming you itemize your deductions in 2015, donating to charity is an effective way to reduce taxable income. You may deduct up to 50% of your adjusted gross income for most charitable contributions, or up to 30% in some cases. See the IRS database for a list of exempt organizations. December 31st is the deadline for donating to a charitable organization to include on the current year’s tax return. Happy giving!
6. Take Required Minimum Distributions (RMDs) from your Employer-Sponsored Retirement Plan
You are required to withdraw money by April 1st of the year following the year you turn 70-½. However, non-5% company owners who continue to work may defer RMDs until April 1st following the year of retirement. Failure to take the RMD may result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you may delay the first RMD to 2016. But if done so, you will have to take a double distribution in 2016 — the 2015 required amount plus the 2016 required amount.