Tax Planning Ideas for 2015

John J. FureyMay 1, 2015


Since April 15, 2015 has come and gone you are probably quite happy to put aside any thoughts about taxes until sometime in early 2016. If you do that you are missing out on the opportunity to do tax planning for 2015. Since the memory of filing your taxes for 2014 is still fresh in your mind it is a good time to decide what steps you should take to help ease the burden of preparing and paying your taxes for 2015.  The primary reasons to do tax planning are to make sure that you pay the right amount of taxes throughout the year and that you take whatever actions that you can to reduce your taxes. If you wait until sometime in late 2015 or early 2016 to start thinking about your 2015 taxes, you will miss out on ways to reduce your taxes.

Make sure you are paying the right amount of taxes throughout the year

If you did not pay a sufficient amount of taxes throughout 2014 to meet one of the safe harbor tests, you owed an underpayment penalty in addition to having to pay whatever taxes were due. The safe harbor tests require that you pay throughout the year as the income is earned. You can meet this obligation through withholding or making quarterly estimated tax payments, or both. If you taxes due for 2015 are more than $1,000, you will be subject to a penalty unless 2015 withholdings and estimated taxes equal or exceed the lesser of 90% of your 2015 tax liability or 100% of your 2014 tax liability (110% if your Adjusted Gross Income (AGI) exceeds $150,000 for married taxpayers).

The best way to meet your tax obligation is through withholding because amounts withheld are considered as being paid equally throughout the year, even if the withholding occurs in the last month of the year. Estimated tax payments are considered paid only when the actual payment is made.  If you had a large amount of income in the first quarter of 2015 that was not subject to withholding and you didn’t make the related quarterly tax payment for the income until the third quarter, you will owe an underpayment penalty for the six months the tax was not paid.

If you had too much money withheld and you received a large tax refund, you gave the U.S Treasury an interest-free loan. You could have invested the extra money during the year and had the money working for you instead of working for the U.S. Treasury.

Payroll withholding

There is an IRS tax withholding calculator that you can use to calculate how much you should have withheld from your pay check. It is especially important for married couples who both work to check to make sure enough is being withheld from their pay. Payroll withholding calculations done by companies do not take into account the amount of money being earned by a spouse and the related tax consequences. In order to use the calculator you should have copies of you and your spouse’s most recent pay stubs and a copy of your 2014 tax return.

If restricted stock vests or you exercise stock options, in most instances the income from these actions are subject to a flat 25% withholding rate. If you receive this income late in the year and as a result your marginal tax rate increases to 33%, you will owe the additional 8% on the income.  It is a good idea to use the IRS tax withholding calculator sometime during June or July of this year to determine if you need to have more withheld to meet your tax obligations. By doing the calculation at this time you will be able to spread any additional required withholding over the remaining months in 2015.

Withholding from pension or IRA distributions or social security payments.

You can elect to have taxes withheld from pension or IRA distributions by contacting the company making the distributions.  You can also elect to have taxes withheld from you monthly social security checks. By visiting the social security website, you can find information for withholding taxes from your payments. You can make an election to withhold when you first apply for benefits or at a later date when you want withholding to start.

Quarterly estimated tax payments

As explained above you must be careful when using this method to pay your taxes to ensure that the quarterly payments will meet one of the safe harbor tests listed above. The quarterly payments for 2015 are due on April 15, 2015, June 15, 2015, September 15, 2015 and January 15, 2016.

Some ways to reduce taxes

When considering ways to reduce your tax obligations, you should keep in mind your marginal tax bracket and possibly the marginal tax brackets of your children. For purposes of illustration in the following examples it is assumed that you are in the 33% marginal tax bracket and that your child is in the 15% marginal tax bracket. This article provides the tax brackets for 2015.

Contribute the maximum amount to retirement savings

The elective contribution limit if you participate in a 401(k), 430(b) and most 457 retirement plans is $18,000. If you are over 50 as of the last day of 2015, you can make a catch-up contribution of $6,000. If you contribute $24,000 to your retirement account, you will reduce your federal taxes by $7,920. If you are not covered by a retirement plan, you can contribute to an IRA for you and your spouse provided your earned income exceeds the amount of the contribution. The limit on IRA contributions is $5,500 per person or $6,500 per person if over 50. If you are self-employed, you have a range of retirement savings vehicles available to you.

In addition to reducing your taxes all of the above retirement contributions also reduce your Adjusted Gross Income (AGI). If your AGI exceeds $200,000 (single) or $250,000 (married), you may have to pay the 3.8% Net Investment Income Tax and the 0.9% additional Medicare tax. If your AGI exceeds $258,250 (single) or $309,900 (married) the tax benefit of your itemized deductions and personal exemptions will begin to phase out. If your AGI is close to these limits and you can manage to stay below them, you will reduce your taxes.

Monitor Capital Gains and Losses  

You can offset capital gains with capital losses. You should try to manage your capital gains so that they are considered long-term, meaning held over one year. Long-Term Capital Gains are taxed at 15% instead of 33%. If your losses exceed your gains you can deduct up to $3,000 in losses from your AGI. If your losses exceed $3,000, you can carry over the losses to future tax years to reduce your taxes. While harvesting losses can make sense from a tax standpoint, make sure you consider investment implications and transactions costs. If you are going to make an investment in mutual funds in 2015, you should inquire about the projected timing and size of any capital gains distributions from the funds. If you invest right before a capital gains distribution, you will be liable for the taxes on the distribution.

Invest in Tax-Free Municipal Bonds

If you invest in tax-free municipal bonds and you receive $10,000 in interest income, you will save $3,300 in federal taxes. If you invest in municipal bonds of the state of your residence, you will owe no state taxes on the $10,000 in interest.

Gift Appreciated Assets to Charity or Your Children

If you gift stock that has a fair market value of $20,000 and a tax cost basis of $5,000 to a qualified charity, you will get a tax deduction of $20,000. You will not have to pay the capital gain tax on the $15,000 of gain. You will reduce your taxes by $6,600 and avoid paying a capital gain tax of $2,250.

Instead of giving it to charity, if you and your spouse gift the same stock to your daughter who is 24 years old and she immediately sells it she will owe no capital gains tax on the sale. Because she is in the 15% marginal tax bracket, any long-term capital gain or qualified dividends she receives is taxed at zero. If she is under 24 and a full-time student the so-called kiddie tax would apply to any investment income over $2,000.

Contribute to 529 College Savings Plan

If you contribute to a 529 plan for a relative, you can deduct any contribution up to $14,000 per person and per beneficiary to reduce your Pennsylvania taxes. Any income generated in the 529 Plan can be withdrawn tax-free, provided the money is used for qualified education expenses.

Organize tax documents in one place

It is easier said than done, but you should try to put all of your tax-related documents in one file folder or one box throughout the year. When you are getting together all of the necessary papers in order to file your taxes for 2015, it will make a big difference if you have made an effort to put all of your tax documents in one place.

If you have any questions related to any of the above items, please do not hesitate to contact our office (610-651-2777).