Saturday, March 28, 2015

Finish your taxes and then start planning for 2015 savings — now

With 2014 taxes coming due, the last thing we may wish to think about is 2015 taxes. Minimizing 2015 taxes requires tax planning as early in the year as possible. Here are seven strategies that could reduce your 2015 tax bill:

• Charitable contributions.If 2015 cash charitable contributions are planned, consider setting up a charitable giving account. Highly appreciated securities (stocks, mutual funds, bonds, ETFs, etc.) contributed to a charitable giving account receive double tax savings. For those who itemize deductions, an immediate charitable deduction on the security's market value is received. The contributed securities will also avoid long-term capital gains taxes (now up to 23.8 percent). Schwab, Fidelity, Vanguard and other brokerage firms can help set up a charitable giving account.

• Health Savings Accounts. With a qualified high-deductible health plan, individuals may contribute up to $3,350 and families up to $6,650 to a HSA. Contribution limits for participants who are age 55 or over are increased by $1,000. HSA contributions are tax-deductible, and funds taken from the HSA are also tax-free when used for qualified medical expenses. Postponing the use of HSA funds until retirement provides for tax-free growth of HSA funds. Thus, HSA contributions combine the tax advantages of a traditional IRA and a Roth IRA.

• Limiting company-sponsored retirement plan — 401(k) and 403(b) — contributions. It is virtually always smart to contribute to a company-sponsored retirement plan up to the maximum company matched amount. The company match can be considered "free money."

However, with the high expenses and limited investment diversification offered by many 401(k)-type retirement plans, it may be wiser to place any additional retirement savings into a traditional or Roth IRA. If adjusted gross income is under $61,000 for individuals or $98,000 for couples, a traditional IRA contribution up the maximum of $5,500 ($6,500 if over age 50) is also allowed. For an AGI above these amounts but below $116,000 for individuals or $183,000 for couples, contributions of the same amounts may be made to a Roth IRA. Traditional IRAs and Roth IRAs may provide more investment options and lower costs than many company retirement plans.

• Spousal IRAs. Even if only one spouse has taxable earnings, each spouse may contribute $5,500 ($6,500 if age 50 or over) to their own IRA or Roth IRA, as long as the wage-earning spouse has no company-sponsored retirement plan. If the wage earner has a company-sponsored retirement plan, their spouse may make a full contribution to a traditional IRA or a Roth IRA, as long as the couple's 2015 adjusted gross income is $183,000 or less.

• State sales tax deductions. Assuming Congress once again provides for this in 2015, taxpayers who itemize deductions and expect a relatively low income year in 2015 may want to use the state sales tax deduction in lieu of state income tax deduction. This is especially true when purchasing a car, boat or any other "large ticket" item. By saving the receipts of all of the higher-priced purchases made in 2015, the amount of sales taxes paid may be higher than your 2015 state income taxes, providing for a larger income tax deduction.

• Roth IRA conversions. For taxpayers with limited income and large tax deductions, converting IRA funds to a Roth IRA often can be done with minimum or even zero taxes paid for this conversion. Roth conversions can be done at any age, with the converted Roth funds never taxed in the future.

It is never too early to begin 2015 tax-savings strategies. Early tax planning can help minimize 2015 federal and state income taxes.