A 12-Step Program for Year End Tax Planning

My name is Johanna T. and I am a tax filing procrastinator.The Bobfather and I file our tax returns on October 15 each year. If you, too, are a habitual tax postponer, a New Year’s tax resolution will be too late. Starting before the end of the year can not only save you money, but also frustration next April when you’d rather be enjoying spring weather than rounding up receipts. My 12-Step Program is a great tool to ease you into recovery.

  1. Top off tax-deferred contributions These include your 401k, flex-spending accounts, your HSA (Health Savings Account), and IRA. You have until 4/19/16 for all but the 401k, but the sooner you contribute, the sooner you’ll put your money to work.
  2. Convert to a Roth IRA You have until 12/31 to move money from a pre-tax retirement account to a Roth. There are many reasons to convert to a Roth (see my prior article) and you have until 10/15 of the following year to recharacterize (or “undo”) your conversion. This is one of the most overlooked tax-planning moves I run across in my practice.
  3. Check your payment status If you haven’t made all of your estimated payments, you can catch up, penalty-free, through withholdings in December. Employees can do this on a paycheck. If you’re retired and taking distributions from your 401k/IRA, you can take a distribution of the amount you’re behind and have it all go to taxes. You can use this technique with a Roth IRA to avoid taxable income.
  4. Clean out your closets If your closets are full of clothing you no longer wear, donate it to your local charity before 12/31 for a great tax write-off. As always, we recommend you purchase a copy of Deduct It! Deduct It! to organize your records and get the best deduction value allowed by the IRS. (Of course, if you’re a client, just call us for a free copy.)
  5. Review your receipts If you have donated $250+ at one time to a charity, you are required to get a “contemporaneous” receipt. In other words, you can’t go back to the charity if you’re later audited and get a receipt, even if the donation is valid, so get one now.
  6. Check your itemizers You may have heard of deduction bunching. You do this when you don’t have enough to itemize every year, but you come close. By bunching, you itemize every other In other words, you may want to pay your state estimated taxes in December rather than January if you can itemize this year. Same for real estate taxes – bunch them at the beginning and the end of the year. Consider making your January church contributions in December and so on.
  7. Search for a new CPA If you’re planning on making a change or this is the year you finally need more than Turbo Tax, you’ll get more attention when interviewing candidates if you don’t wait until January.
  8. Calculate your health care credit status Wondering if you are going to have to pay back some of your credit? This nifty IRS calculator will figure the impact of mid-year life changes on your credit.
  9. Review your mileage If you’ve been too busy to calculate those medical, business, or charity miles, get out your calendar and fill in the holes – mileage deductions can make a big difference. While you’re at it, go ahead and download one of the clever new apps for automatically recording and calculating your mileage. MileIQ and TaxMileage are just a couple that are free and easy.
  10. Make your annual gifts If you’ve set up an annual gifting program to pass along $14k to your heirs each year, you must write and distribute the checks by 12/31 for them to count for the current year. And remember, the $14k annual limit includes all gifts during the year. If you’ve made Christmas and birthday gifts, you might want to limit the final check to $13k or whatever is applicable.
  11. Check long-term capital gains and losses Have you realized a gain on any investments during the year? If so, review your portfolio to see if you have some duds that need to go. You can buy them back 31 days later if you really can’t bear to live without that particular loser.
  12. Make sure you’ve taken your Required Minimum Distribution (RMD) Don’t depend upon your brokerage or financial advisor to make those annual RMDs. Most do, but it’s up to you, not the brokerage, to follow the rules. Penalties for missing your distribution are the most onerous in the tax code: 50% of the amount missed per year. So if you miss a $10,000 RMD for two years running, your penalty is already $10,000! Plus, of course, the taxes you already owe on a pre-tax distribution.

If you actually have missed an RMD, the IRS can be fairly forgiving if you take the proper steps to remedy your mistake. Watch my video to find out what to do for a missed RMD withdrawal.

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