What do you get when you cross a tax attorney with a financial adviser? A nerd who is extremely busy towards year end.
Here is a quick list of year-end planning tips:
- Tax-loss harvesting. This should be done throughout the year when cost efficient, but December 31 is your deadline. Don’t forget about wash sales.
- Gain harvesting. Some people in lower tax brackets can shelter capital gains at a 0% tax rate. This could apply to many residents and fellows unless their spouse earns a reasonable income.
- Donations, medical expense deductions, unreimbursed employment expenses, property tax and state tax payments, 529 contributions, energy credits, etc. Almost all of these are tied to the calendar year, so whether you make your donations outright or through a donor advised fund, don’t wait until the last minute. Depending on your other itemized deductions and the amount of your medical expenses each year, many of these deductions can be pushed forward or backward a year so as to have one year in which you have enough deductions to itemize (or deduct your medical expenses) and then the next year you take the standard deduction.
- The tuition and fees deduction sunsets at the end of this year, so if you take this deduction, go ahead and pay next semester’s tuition before December 31.
- Some flex spending accounts have a use-it-or-lose-it deadline of December 31, but others have a deadline of March 15. Make sure to know your plan’s deadline.
- 401(k), 403(b) and other employer sponsored plans have a December 31 deadline. Many plans will allow you to change your contribution rate, so it may not be too late to catchup on your retirement plan with your last paycheck of the year. IRAs and HSAs typically have an April 15 deadline.
- Double check your tax withholding. Generally, you can use your 2015 tax return as a guide for how much tax needs to be withheld from your paycheck, or sent in as an estimated tax payment, throughout the year. It’s not too late to send in a check to the IRS, or submit a new W-4 to your employer to have extra tax withheld from your last paycheck this year. For married filing jointly taxpayers with more than $150,000 of adjusted gross income in 2015, you can avoid underpayment penalties by making sure to pay the IRS at least 110% of your 2015 tax. Taxpayers under that AGI amount must only pay in 100% of their 2015 tax to avoid penalties. In all cases, the other safe harbor is if your tax payments are equal or greater than 90% of what you ultimately owe in 2016.
- Income deferment. There’s no guarantee from me, but it is possible that income tax rates will decrease in 2017 under the new administration, in which case it may be preferable to push off income from December 2016 into 2017.
- IRA to Roth rollovers. One of the best times to do this is in residency or fellowship before your income spikes as a physician. There is a process by which you can split up your rollover into multiple Roth accounts, and then depending on what happens to the investments during the tax year, you can then reverse the rollover for the investments that decreased in value while paying tax on the investments that increased in value.