RETIREMENT TIPS: Year-end Tax Reduction Tips

By ALAN KONDO, CLU, CFP

Even though April 15 now seems a distant deadline for filing your 2015 tax returns, in order to take advantage of some of the biggest tax reduction strategies, you have to act before the end of this year. Here are three strategies that you may want to execute by Dec. 31.

1. Maximize Contributions to Tax-Advantaged Accounts

Contributing to your employer’s retirement plan is one of the smartest tax moves you can make. For 2015 (and 2016) you can shelter up to $18,000, or $24,000 if you are age 50 or older. Because contributions are typically made on a pretax basis, qualified plans such as 401(k)s and 403(b)s help to lower your current taxable income. Plus, the money in the account is allowed to grow tax deferred until you begin taking withdrawals, usually in retirement.¹

If you have maxed out contributions to your employer’s plan, but want to save even more, consider funding a Roth IRA. You can contribute up to $5,500 in 2015 and 2016, or $6,500 if you are 50 or older. For many employees who are participating in an employer-sponsored retirement plan, contributing to a Roth IRA may be preferable to contributing to a Traditional IRA. This is because if your adjusted gross income is $61,000 or more if you are single, or $98,000 or more if you are married and filing jointly, contributions to a Traditional IRA might not give you a tax deduction.

Even though you have until tax day — April 15, 2016 — to fund an IRA for 2015, why wait? Funding it by year-end potentially gives it all the more time to grow tax-deferred.

2. Consider Tax-Loss Harvesting

Tax-loss harvesting is the process of offsetting portfolio gains with losses to help minimize your exposure to capital gains tax. In a year like 2015, in which the stock market experienced a significant late-summer swoon, such a strategy may be particularly attractive.

Generally, the IRS allows you to offset capital gains with capital losses to the extent of your total gains. If you have no gains, you may be allowed to deduct up to $3,000 against ordinary income each year, thus potentially lowering your tax liability. Losses in excess of that limit can be carried over to the next year. To be sure you are doing this correctly, consult with your Certified Financial Planner™ or CPA.

Before you sell, consider the length of time you have held a security. Securities sold within a year of their purchase can generate short-term capital gains, which are taxed at the investor’s ordinary income tax rate — up to a maximum rate of 39.6% for the highest-earning individuals.

Gains from the sale of securities held for more than one year are considered long-term gains and are taxed at a maximum rate of 15% for most Americans, but that rises to 20% for those with taxable incomes of over $400,000 ($450,000 for joint filers). In addition, the Medicare surtax on net investment income, which includes capital gains, results in an overall top long-term capital gains tax rate of 23.8% for high-income taxpayers.

The bottom line on tax-loss harvesting? If you are considering employing this strategy, evaluate carefully the investments you may select for sale, then discuss your plan with a trusted financial advisor.

3. Timing Is Everything

If you expect your taxable income to be higher than normal for the 2015 tax year, you may want to accelerate tax deductions and, where possible, to defer income. For instance, you could increase your charitable deductions or make advance payments for state and local taxes, insurance premiums, interest payments, medical procedures, or other deductible expenses for which you may be able to control the timing. Similarly, you may be able to delay some forms of discretionary income or hold on to stocks that have performed exceptionally well at least until early 2016, being mindful of what you expect your tax/income situation to be next year.

These are just some of the many steps you can take to help keep your taxes in check. Work with your financial and tax advisors to make tax planning an integral part of your overall financial plan.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

¹ Withdrawals from traditional IRAs are taxed at then-current income tax rates. Withdrawals prior to age 59½ may be subject to an additional federal tax.

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The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.