Making the Best of a Bad Situation

The stock market has been going mostly up in recent months, but even the shrewdest investors occasionally buy stock that turns out to be a “dog.”  The trick is to make the most of losses.  Continuing to hold stock that is dropping in value, in the hopes of a rebound, may not be the best move.  Often, it’s smarter financially to cut your losses and use the sales proceeds to reinvest in a company with better short-term prospects.

Losses from the sale of stock may be used to offset capital gains earned on the sale of stock that has appreciated in value.  If capital losses exceed capital gains, the losses may be used to offset up to $3,000 of ordinary income each year until all the losses are deducted.

Another good idea for loss investments: sell the stock and give the proceeds to charity.  You’ll receive the capital loss deduction and a charitable deduction.

Pay Yourself, Not the IRS

Are you expecting a big refund on your 2014 income taxes?  If so, you gave the IRS an interest-free loan last year.  You should take some time now to recalculate your withholding or estimated payments to make sure you don’t underwithhold or overwithhold in 2015.

The tax laws require that you prepay at least 90% of the income taxes you owe for the year, through withholding from income or timely estimated payments.  A safe-harbor provision allows taxpayers to pay in the lesser of 90% of the current year’s taxes or 100% of the prior year’s taxes (110% if the prior year’s adjusted gross income exceeded $150,000).

From a financial standpoint, it’s much smarter to owe the IRS a small amount in April than to receive a large refund.  But if you’re a taxpayer who likes getting a big refund, you may want to consider another option: reduce your withholding and pay yourself the difference.  Have your tax adviser estimate how much you’ll owe in taxes for 2015; adjust your withholding and/or estimated payments so you pay the minimum necessary to avoid the underwithholding penalty.  Open a savings account into which you put the difference between what you would have paid the IRS throughout the year.  Then, in April of 2016, withdraw the savings and pretend it’s a refund from the IRS. 

Doing the Unexpected

Conventional wisdom says that retirees should postpone withdrawals from IRAs and other tax-sheltered accounts as long as possible.  Rely on taxable investments, the thinking goes, and let the retirement accounts grow.  But there may be reasons to do the opposite.

Mandatory distributions begin by April 1 of the year after the year the account owner turns 70½ (except for Roth IRAs, which do not have minimum withdrawals requirements).  The owner is generally taxed at ordinary income rates on distributions.  If IRA withdrawals are not taken prior to age 70½, the account may have grown to the point where the minimum distributions will push the owner into a higher income tax bracket.

However, if withdrawals are made after age 59½, when the early withdrawal penalty is not a concern, and before age 70½, it may be possible to reduce the overall taxes.  But what if you don’t need the funds?  The amount withdrawn from the retirement plan can be invested for growth.  If and when you need to tap this source of income, capital gains rates (generally 15%) may apply.

Another reason to spend down an IRA rather than a taxable account: At death, assets passing to family members from an IRA will be subject to income tax.  (The tax can be avoided if retirement plan assets are left to charity.)  Appreciated stock or mutual fund shares, on the other hand, generally will be entitled to a step-up in basis to the date-of-death value, meaning family members can avoid all tax on pre-death appreciation when shares are sold.

If renewed for 2015, IRA owners ages 70½ and older can have the custodian make direct gifts to charity (up to $100,000), free of the income tax that would normally be owed when withdrawals are taken.  The distribution can satisfy the required minimum distribution, thereby saving income tax even though no charitable deduction is available.  Call us if you have questions about making a gift from an IRA or to check on the status of a renewal.

April 15: More Than Income Taxes

April 15 is the deadline for filing most income tax returns, but there are other taxes that are due the same day.

Gift tax — If you made taxable gifts in 2014, April 15 is the deadline for filing a gift tax return.  In general, you need to file a return for gifts in excess of $14,000 to any one person or for a gift of any size that doesn’t provide benefits for more than one year in the future.  Spouses also need to file a gift tax return if they are electing to split gifts.  Filing a return doesn’t necessarily mean that you’ll pay gift tax, however.  You are not required to file a gift tax return for gifts to charity in excess of $14,000, provided the entire value of the gift qualifies for the gift tax charitable deduction.

Nanny tax — The nanny tax applies to more than just those hired to supervise young children.  If you pay someone to take care of an elderly relative, clean your home or maintain your yard, you may be required to pay employment taxes.  The tax applied to wages of $1,900 in 2014 (and in 2015).  You don’t necessarily have to file a separate return, however; you can add the tax to the amount you owe to the IRS on April 15.

Kiddie tax — The unearned income (interest, dividends, capital gains) in excess of $2,000 in 2014 of children under age 19 (age 24 for full-time students whose earned income is less than half the child’s support) is taxed at the parents’ top tax rate.  The income can be added to the parents’ return rather than filing a separate return for the child.  The kiddie tax applies to unearned income in excess of $2,100 in 2015.


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The materials contained on this website are intended only to show some ways by which you can make a charitable gift or bequest and thereby minimize federal tax liabilities, as authorized by the Internal Revenue Code. All examples are of a general nature only and should not be applied to your specific situation without first consulting your attorney or other advisers.