3 Year-End Tax Planning Strategies to Consider

By Jeffrey Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott

Year-end means busy. Chaotic, time-strapped busy with family obligations, festive celebrations and closing the books on 2015. “Closing the books” includes year-end tax planning – and to assist with that endeavor – I’ve detailed three tax planning strategies you should consider at year-end. The Slott Report has already put out a lot of other great year-end material, including three RMD mistakes to avoid and four facts you must know about a 2015 distribution you plan on rolling over in 2016.

So, if you are self-employed, own your own business or just want to take advantage of tax-saving strategies, read on for my list of key year-end maneuvers.

1. Accelerate/Defer Business Expenses. Are you self-employed? Own your own business? If so, then, to a certain extent, you may have some flexibility in terms of controlling your profit for the year. Isn’t more profit always better? Not necessarily. Remember, more profit means more tax.  If you run a cash-basis business, then you can generally deduct your expenses in the year you pay them. For instance, if you pay six month’s worth of real estate taxes on December 1, 2015, you can deduct the full amount of that payment as an expense on your 2015 tax return (accrual-basis businesses could only deduct 1/6 of that payment). Conversely, if you paid the same bill on January 1, 2016, you would deduct the full amount next year. Which is better? It depends on your individual situation.

   Was your income way down this year? Then consider delaying the expense until 2016. Did you get a big surge of unanticipated revenue? Consider paying the expense in 2015. Applying for a business loan? Consider making your payment next year, so you show the most profit on your 2015 tax return – which will no doubt be reviewed. You get the point.
    

2. Tax Loss Harvesting. One of the most – if not the most – tried and true year-end planning tactics is tax loss harvesting. Simply put, you’re looking for investments that have gone down in value since you purchased them. While nobody really wants to own a “loser,” they can serve a useful purpose when it comes to tax planning.

   When you sell an investment at a loss, you can use that loss to offset an equal amount of investment gain, thereby reducing your tax bill for the year. It’s that simple. Think the loser investment is going to make a strong comeback? Well then you can always buy it back after 30 days. Doing so before that time would be deemed a wash sale, and would eliminate the current tax benefit. And remember, this strategy does not apply to IRA or other retirement account assets.
    

3. Tax Gain Harvesting. What? Tax gain harvesting? Is that a type-o? Nope. Not at all. While tax loss harvesting is a regular component of many advisor’s and savvy taxpayer’s year-end planning, tax gain harvesting is rarely considered. Under current tax law, if you fall into either the 10% or 15% ordinary income tax brackets, your long-term capital gains are taxed at 0%. That’s right, z-e-r-o percent! So here’s the strategy in a nut shell… If you’re going to find yourself in either the 10% or 15% bracket, considering selling some of your investments with a gain and then buying them right back! If you sell the investment, you’ll pay tax on the gain, and as long as the gain doesn’t push you out of the 15% bracket, that gain will be taxed at 0%. When you repurchase the investment, that value becomes your new, higher cost basis, so if you decide to sell that investment again sometime in the future, your tax liability will be less.