With only a few weeks left in the year, here are a few ideas for how individuals can save on their 2015 taxes.
Make HSA contributions.
A taxpayer who is an eligible individual under the health savings account (HSA) rules for December 2015, is treated as having been an eligible individual for the entire year. Thus, an individual who first became eligible on, for example, Dec. 1, 2015, may then make a full year’s deductible-above-the-line contribution for 2015. If he makes that maximum contribution, he gets a deduction of $3,300 for individual coverage and $6,550 for family coverage (those age 55 or older also get an additional $1,000 catch-up amount).
Accelerate deductible contributions.
Individuals should keep in mind that charitable contributions and medical expenses are deductible when charged to their credit card accounts (e.g., in 2015) rather than when they pay the card company (e.g., in 2015).
Be sure to take required minimum distributions (RMDs).
Taxpayers who have reached age 70- 1/2 should be sure to take their 2015 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-1/2 in 2015 can delay the first required distribution to 2016. However, taxpayers who take the deferral route will have to take a double distribution in 2016 — the amount required for 2015 plus the amount required for 2016.
Make year-end gifts.
A person can give any other person up to $14,000 for 2015 without incurring any gift tax. The annual exclusion amount increases to $28,000 per donee if the donor’s spouse consents to gift-splitting. Annual exclusion gifts take the amount of the gift and future appreciation in the value of the gift out of the donor’s estate, and shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).
Solve an underpayment of estimated tax problem.
An employed individual who is facing a penalty for underpayment of estimated tax as a result of either of these new taxes or for any other reason should consider asking his employer—if it’s not too late to do so—to increase income tax withholding before year-end. Generally, income tax withheld by an employer from an employee’s wages or salary is treated as paid in equal amounts on each of the four estimated tax installment due dates. Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.
An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if he is facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution at a 20% rate and will be applied toward the taxes owed for 2015. He can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.
If you have questions about any of these strategies, please contact us.