Year-End Tax Planning 101 - Part 2

Last week I talked about tax planning when income is the same or higher than usual. This week i'll focus on what to do when income is lower than normal. Why do anything if your taxes will already be low? Well, you may be able to save a lot of money in the long-run if you are thinking beyond this year. You may be able to take advantage of 0% or 15% rates instead of 28-39.5% in the future. 

Step 1: Know your tax position:  Sound familiar? see part 1 to familiarize yourself with this step.

Step 2: Take Action. If this year's income is low: There are options to shift some of your income or expenses, or roll over IRAs.

Shift income into the current year, and delay expenses - If you recognize income in December instead of January, you have changed your tax position. Likewise, you may be able to make a deductible expense payment in January instead of December. 

Consider selling some of your appreciated stock - If you are married and make less than 72k, capital gains are now at 0%. This may be chance for you to recognize some of your gain. Rates may not be this low forever. 

Sell IRAs or Roll IRAs into Roth IRAs - By rolling over your IRA into a Roth IRA, you will recognize income in the current year, but the money will not be taxed again. This is perhaps the easiest way to recognize income sooner. 

I have a successful client who decided to take 2014 off and live in Paris. Without the day job, her income is way down, so she is rolling some of her IRA into a Roth IRA this year, taking advantage of the low rates. 

Another client is elderly and in a nursing home, but with large IRAs. Rather than just taking out the required minimum amount, he is withdrawing larger amounts each year, so they can be taxed at his low rate. His children will inherit cash rather than an IRA being taxed at 28% to them.

Summary: Effective tax planning involves taking into account your current tax position, where you may be in the future, and possible changes you can make. Every tax situation is unique. The tax code is littered with limitation and exceptions, but these basic concepts will help over time. If you want to find out just how much you can save, talk to your tax specialist.