Financial Tips for the End of the Year
As 2015 draws to a close, people across the nation are scrambling to find ways to decrease their taxes and prepare their finances for 2016. Don Chamberlin, President of The Chamberlin Group, shares the following advice on tax law changes and Obamacare to help you avoid fees and penalties.
Retirement Plans
If you’re using a 401(k) to fund your retirement, you’ll be glad to know that the maximum annual contribution has risen from $18,000 to $24,000 for individuals over the age of 50. Even if you can’t put in the maximum amount, try to contribute as much as possible – or enough to maximize the amount your employer contributes. Talk with your employer about raising payroll deductions for the remainder of the year if you want to contribute more.
For a traditional IRA, the maximum contribution amount hasn’t changed since last year ($6,500 for anyone over 50; $5,500 for everyone else). The same is true for Roth IRAs. If your annual income is too high for Roth contribution limits, consider the new Backdoor Roth IRA, which I wrote about in brief last week. Remember that you can continue to contribute to your 2015 retirement plan until Tax Day, which in 2016 falls on April 18th.
Income and Deductions
Minimize your taxable income by postponing bonuses and commissions. If you’re expecting lots of money to come your way near the end of the year, you may want to ask your boss to wait until January. In addition, make sure all gifts and charitable donations are complete by the end of December. If you plan to give cash this holiday season, you can gift up to $14,000 per person to family and friends without paying the federal gift tax.
Do you have a 529 college savings plan? In many states, 529 contributions are tax deductible. Look into how your college plan may save you money in taxes.
You may also be able to save money if you’ve lost money this year. The IRS allows individuals to claim deductions of up to $3,000 a year from capital losses. Keep in mind the sale of stocks or mutual funds must be complete by the end of the year. If you’ve lost more than $3,000, you may be able to offset capital gains for 2015 or carry those losses forward into future years. If you’ve lost more than $3,000 in years past, you may be able to claim those deductions this year and in the future.
Medical Expenses and Obamacare
Check into the amount you and your family spent on medical bills this year. If qualified expenses are more than 10% of your Adjusted Family Income, you can use the amount over 10% as an itemized deduction. Keep in mind the expense threshold is higher for those over 65 (7.5%). Check out IRS publications to find out which expenses qualify and which do not.
Don’t get hit with an Obamacare fine! The penalty for not having health insurance has risen dramatically since last year. Adults without health care face a maximum fine of $325. For those in higher tax brackets, that fee can be as much as 2% of your household income. There are exemptions, but most people do not qualify.
In 2016, the fee for refusing healthcare will rise to $695 per adult and 2.5% of household income for those in higher tax brackets. Shop now if you want to avoid a fee next year.
Retirement Plan Penalties
If you have a pre-tax contribution funded retirement plan and you’ve reached the age of 70 and one half years during 2015, you will need to start taking RMDs (Required Minimum Distributions). Roth plans that are funded with post-tax money do not require RMDs.
Those who forget about RMDs face a 50% tax on the required distribution. You can also be penalized for late or partial distributions. According to a Fidelity review in mid-November, an estimated 67% of IRA-holders have not yet made the full requirement. Over 54% of those individuals have taken no distributions. RMDs are based on total account value at end of year and your age. An online calculator or financial advisor should be able to help you when making withdrawals.
