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year end tax strategies


The end of the year is always a hectic time but taking the time to sit with a tax professional and determine what tax strategies will work best for you may save thousands on your tax bill due April 15th.  The purpose of this article is to discuss some of the more common year end tax strategies that may apply to you.  Some of the deadlines for these strategies aren’t until tax filing but the majority include an action item that must be done by December 31st to qualify and therefore taking the time before year end is crucial.

Taxable Investment Accounts


Offset some of the realized gains incurred during the year by selling investments in loss positions.  Often times dividends received and sales made in a taxable investment account are reinvested.  Although the owner of the account never received cash in the transaction, the gain is still realized and therefore taxable.  This may cause an issue when the cash is not available to pay the tax bill.  By selling investments in a loss position prior to 12/31, you will offset some, if not all, of the gain realized during the year.  If possible, sell enough investments in a loss position to take advantage of the maximum $3,000 loss that can be claimed on your tax return.

Note:  The IRS recognized this strategy was being abused and implemented the “wash sale” rule.  If you sell an investment in a loss position to diminish gains and then repurchase the same investment within 30 days, the IRS does not allow you to claim the loss therefore negating the strategy.

Convert a Traditional IRA to a Roth IRA


If you are in a low income year and will be taxed at a lower tax bracket than projected in the future, it may make sense to convert part of a traditional IRA to a Roth IRA.  The current maximum contribution to a Roth IRA in a single year is $5,500 if under 50 and $6,500 if 50 plus.  You will pay taxes on the distributions from the traditional but the benefit of a Roth is that all the contributions and earnings accumulated is tax free when distributed as long as the account has been opened for at least 5 years.  Roth accounts are typically the last touched during retirement because you want the tax free accumulation as long as possible.  Also, Roth accounts can be passed to a beneficiary who can continue accumulating tax free.   Roth money is after tax money and therefore the IRS allows you to withdraw contributions tax and penalty free and let the earnings continue to accumulate tax free.  If you don’t have the cash come tax time to cover the conversion, you can convert the Roth money back to a traditional IRA by tax filing plus extension and the account will be treated as the Roth conversion never took place.

Donate to Charity if you Itemize


If you itemize deductions on your tax return, go through your closet and donate any clothing or household goods that you no longer use.  There are helpful tools online that will allow you to value the items donated but be sure you keep record of what was donated and have the charity give you a receipt.

Max Out Your Employer Sponsored Retirement Plan


If you know you will be hit with a big tax bill and want to defer some of the taxes, max out your retirement plan if you haven’t already.  Employer sponsored plans, such as 401(k)’s, must be funded through payroll by 12/31 and therefore it is important to make this determination early and request your payroll department start upping your contribution for the remaining payroll periods in the year.  The maximum for 401(k)’s in 2015 and 2016 is $18,000 if under 50 and $24,000 if 50 plus.

Business Owners – Cut Checks by 12/31


If your company had a great year and the cash is available, use it to pay for expenses you would normally hold off on.  This could mean paying state taxes early, paying invoices you usually wait until the end of the payment term, paying monthly expenses like health or general insurance, or buying new office equipment.  By getting the checks cut by 12/31, you realize the expense in the current year and will decrease your tax bill.

Business Owners – Set Up a Retirement Plan


For owners with no full time employees, a Single(k) plan being put in place by 12/31 will allow you to fund a retirement account up to the 401(k) limits mentioned early.  As long as the plan is established by 12/31, the owner will be able to fund the plan any time before tax filing plus extension.  If the plan is not established by 12/31, other options like the SEP IRA are available to take money off the table come tax time.

With tax laws continuously changing, it is important to consult with your tax professional as there may be strategies available to you that could save you money.  Don’t procrastinate as some planning before the end of the year may be necessary to take full advantage.


Rob Mangold

About Rob………

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

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