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Tax Season Preparation: 6 Tax Tips to Follow Before Year End

  |  By Karen Walls

The end of the year is quickly approaching and that means the days are dwindling for you to finish your 2015 tax planning and potentially limit the bill you'll be facing come next year’s tax season.

Tax Day 2016 falls on Monday, April 18 instead of the traditional Tax Day of April 15 due to a conflict with Emancipation Day. That means you’ll have extra time next tax season to prepare your taxes. But this year, you only have a few more weeks to implement changes that could lower your 2015 tax bill.

Here are six actions to consider:

  1. Contribute to your IRA: Contributions to an individual retirement account can apply as a tax deduction. Rather than miss the opportunity to contribute to your retirement savings while also taking advantage of a tax deduction, you can establish a regular contribution into your IRA from your checking account on a monthly or quarterly basis. At PENSCO Trust, we can pull these funds electronically by ACH, taking the hassle out of having to think about contributions.
  2. Take your Required Minimum Distribution: If you are turning 70½ this year and you own a traditional IRA, you will need to begin taking a Required Minimum Distribution (RMD). Since RMDs can be a bit complicated, we wrote this blog for investors who are new to these distributions.

    In short, if you turn 70½ this year, you must take your 2015 RMD by April 1, 2016. But you must also take your 2016 RMD by Dec. 31, 2016. That means you could be taking two RMDs in 2016, which might result in a higher tax bill. It is best to consult with a tax planning professional to determine how best to approach your RMD this tax season.

    If you are 70½ or older this year, you must take a 2015 required minimum distribution by Dec. 31, 2015. Remember, there are significant penalties for not taking your RMD during the correct timeframe, including potentially having the non-distributed portion taxed at 50% (excise tax)
  3. Find out if a Roth conversion is right for you. In a traditional IRA, contributions are made with pre-tax dollars, but you'll pay taxes on future withdrawals. And traditional IRAs are subject to RMDs. In a Roth IRA, contributions are made with post-tax dollars, but future withdrawals are tax free and aren't subjected to RMDs.

    If you hold an asset in your IRA that could have significant growth potential, it might make sense to convert to a Roth. You will pay taxes on the amount you convert, but your earnings will then grow tax free indefinitely.​

    Before making a conversion you should do some tax planning and consider where you expect your tax bracket to be when you retire. If that bracket drops significantly, you may wind up paying more in taxes now to convert than you would save by eliminating taxes in the future. But if your tax bracket isn't expected to fall significantly, it might be in your best interest to convert to a Roth IRA today. This blog offers more information on Roth conversions.  
  4. Consider a Roth Re-Characterization. Did you do a Roth conversion in 2014 and you are now second-guessing that decision because of a decline in the value of the asset in your IRA? Then consider a re-characterization, which allows you to reverse the conversion and get a refund on your taxes. To do this, a gain/loss calculation will need to be performed on the current market value of the asset, and any income derived from the conversion amount will need to be removed from the account.
  5. Establish a Solo(k) plan for your business. Are you a sole proprietor and the only individual working for your company? Then now is the time to set up a Solo(k) plan for your business. Solo(k)s are essentially 401(k) plans for individuals that allow you to contribute funds on a pretax basis and then benefit from growing those funds tax deferred. The deadline to establish a Solo(k) plan is Dec. 31, 2015 if you want to make a 2015 contribution.
  6. Don't forget ongoing account maintenance. It's important that your IRA custodian has your most recent contact information and to ensure your assets are in good standing to avoid any potential unexpected taxable events. For instance, if your custodian shows that a note in your account has expired they are required to distribute the note, which could create a taxable event. The IRS also requires that IRA assets are valued on an annual basis, even if the value of the asset hasn't changed in the past year.

When it comes to taxes it is best to consult with a tax or financial professional. A professional can help you decide what makes the most sense when it comes to tax planning, your overall financial picture and preparing for tax season. After all, Tax Day 2016 will be here before you know it – even if it is scheduled to arrive three days later than usual.

Want to learn more about how you can accomplish these tax strategies in a self-directed IRA?

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This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

Editor’s Note: This is an updated version of a post we originally published in April 2015. We welcome new comments and questions below.