Decrease Your Tax Burden With These Year-End Tips

Posted by: Brookside Admin

We're less than two months away from the end of the year, but there's still time to take action now to lower your tax obligations on your next return. Many of the same tactics employed last year are still viable options this year due to minimal changes in tax laws. However, it's always worth meeting with a professional who can expertly diagnose your specific situation and make intellgient recommendations. Come see us at Brown Kinion CPAs for help with end of the year tax planning. In the meantime, here are a few general suggestions for how to lower your tax burden in the year's final few weeks.

  • Donor-Advised Funds

Donor-advised funds are a way to reap the full benefit of a charitable donation in one tax year, but pay your donation out over time. These are particularly useful if you have a larger than normal tax debt this year due to a temporary increase in income. This could be due to a sale of a business, significant appreciation of investments, or a number of other factors that aren't likely to recur next year. In order to avoid paying substantially more in taxes this year due to a temporarily increased income, you could use donor-advised funds to get the full tax deduction from a large charitable donation this year without having to pay the full amount by December 31st.

  • Tax-Loss Harvesting

For taxable investment accounts where specific assets have incurred losses this year, tax-loss harvesting could be a realistic strategy for offset the taxes on other assets that have gained in value. Put simply, you should take the time to look through your portfolio to pinpoint the assets that have depreciated this year and consider selling them. This way, the money you get from the sales of those assets can be used to pay the taxes on more successful assets, which puts you ahead for this year. Given that the market has been fairly flat this year, with the S&P 500 only up 1.5-percent at the end of October, this is likely a strategy that will be employed by many savvy investors. 

  • Undistributed Trust Income

If you're an individual tax payer, the highest tax bracket, which taxes your income at 39.6-percent, doesn't kick in until $413,200 of income is reached. For married couples, that threshold is $464,850. Compare that with the threshold for trusts with undistributed income. They are subject to the highest tax rate and subject to a 3.8-percent Medicare surcharge if undistributed income levels total more than $12,300. You read that correctly. The threshold for trusts is less than 3-percent of the threshold for an individual tax payer's income. The strategy, then, is simple. Distribute enough of the trust's income to come in below that $12,300 limit. There are a variety of ways to distribute the funds, but the easiest would be to identify children in a lower tax bracket who could accept some of that money without significantly increasing their own tax burden.

These are three strategies that are likely to be used often in the next few weeks by those with unexpectedly high incomes for 2015 and those who are heavily invested.

For recommendations on how to minimize your own tax obligations and prepare for your next tax return, contact the CPAs at Brown Kinion and Company.