Top 6 year-end tax tips

Year end is just around the corner. Make sure that you do not forget to check the following before we get into 2017. Some of these items are fairly straight forward and provide huge value for money.

401k contributions

401k contributions are payroll contributions and hence cannot wait till Jan 2017 (for the year 2016). If you have not maxed out your 401k contributions for 2016 and have the funds to do so, then now is the time.

It is a now or never situation. 401k contributions are tax deductible. If you are in the 25% tax bracket, then you save $250 on taxes right away for every $1,000 you contribute to your 401k.

In addition to the tax benefits, 401k plan offers other advantages too – for example, bankruptcy protection. 401k is protected by Bankruptcy laws. Attorneys cannot seize your 401k account to repay creditors.

Tax loss harvesting

You can deduct up to $3,000 capital losses from your other income. Check your stocks and sell the losers.

It is $3,000 in NET capital losses. Here is how the calculation works:

Example-1: Capital gains $2,000, Capital losses $3,000, net capital losses deducted form ordinary income $1,000

Example-2: Capital gains $2,000, Capital losses $5,000, net capital losses deducted form ordinary income $3,000

Example-3: Capital gains $2,000, Capital losses $6,000 -> net capital losses $4,000. Deduct $3,000 from form ordinary income in 2016 taxes and deduct $1,000 from the ordinary income in 2017 (carry forward $1,000 capital losses in excess of the $3,000 allowed limit per year).

Keep in mind the Wash Sale Rule though – you cannot buy the same or ‘substantially identical’ stock within the 30 days before or after the sale. So if you sell the losses on Dec 31st 2016, then you cannot buy a substantially identical stock in all of Dec 2016 and Jan 2017.

FSA account (insurance)

Some employers offer one of the two grace options: “grace period” of up to 2 ½ extra months to use the money in your FSA OR carry over up to $500 to use in the following year.

If your employer does not offer any of these options, then you will lose the money you have in there at year end. So you have to spend it soon.

You can buy things online up to midnight on Dec 31st. Eligible items include contact lens, sunscreens, and even condoms.


In general, sooner you make your IRA contributions the better it is. You can make IRA contributions for 2016 till the tax filing deadline (Apr 15, 2017… or Oct 15, 2017 with extensions).

But here is the catch: the IRA account should have been opened before Dec 31, 2016.

Yes, let me repeat: You can make IRA contributions for 2016 till the tax filing deadline well into 2017 BUT the IRA account should have been opened by Dec 31, 2016.

So make sure that you have an IRA account open – even if you are not able to contribute later, you do not lose anything.

IRA distributions

One of the extremely harsh penalties that exist in the Internal Revenue Code (IRC/ IRS code) is the failure to take Required Minimum Distributions (or RMDs).

You must start making regular minimum distributions from your traditional IRA after the age of 70 ½.

If you do not, then IRS charges you a penalty of 50% based on the amount that should have been withdrawn.

So if applicable to your situation, make that RMD distribution now. I would suggest not to wait till Dec 31st – sometimes the distribution itself might take a few days.

Property taxes

This is applicable to all property taxes but most significant in case of home owners.

In my county, you get a 4% discount on the annual property taxes if you pay them by November (3% if you pay by Dec, 2% by Jan, 1% by Feb, 0% by March, and you are delinquent if the taxes are not paid till April).

I just paid my property taxes last week and received a 4% discount.

In addition, I will be able to itemize these taxes on the Schedule A when I file my taxes.

IRS audit – 4 main reasons behind it

IRS Audit - 4 main reasons

IRS Audit – 4 main reasons

99.9% of IRS audits happen for 1 of the following 4 reasons: Information reported by others about you, Your historical information, Tons of ‘peer data’, and the Information you are submitting in your current year tax return.

IRS audit returns based on what they know about you – and how do they know about you? They know about you because others (employers, banks) report information about you to the IRS, they know about you because you have submitted tax returns in the past, they ‘know’ what your ‘peers’ report on their income tax returns, and lastly they know about you because of what you are submitting now (current year tax returns).

Let us take these 4 categories of information one by one:

Category 1: Others report information to the IRS

Others like your employer or the bank will report information about you to the IRS. These others fall broadly into two Continue reading

What to know before filling Form W-4?

We will discuss the purpose of W-4 form, why is it important to you as a taxpayer, and what are the things to keep in mind while filling it, and how often should you update it.

Purpose of a W-4 form is to inform your employer about the personal allowances you are planning to claim when you file your tax return for the current year. This information will help the employer assess the amount of taxes you will owe on your wages and withhold a proper amount every pay check.

An excellent starting point to update the W-4 is to look at your tax return for last year. Did you get a refund or did you owe money to the IRS? If you received a refund, then it means your employer was withholding too much throughout the year because your W-4 information was not accurate.

W-4 form

1040 section showing your refund/ Amount due

When too much is withheld from your paycheck, it is like giving IRS an interest-free loan. IRS is not going to pay you any interest on your excess withholding, it will simply return your excess.

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IRS Notice CP14 – Case Study

We will understand what IRS Notice CP14 is and go through a real IRS Notice CP14 that a reader sent to me – understand each section before deciding a future course of action.

A reader sent me the attached asking for my interpretation of the notice. (It is an actual notice that came in today, I have deleted all the PII (Personally identifiable information) – name, address, and social.

What is IRS Notice CP14?

IRS Notice CP14 Albert EinsteinUnderstanding IRS Notice CP14 is pretty straight forward, as it is with most things when someone tries to explain it in simple English. There are two reasons why ‘some’ professionals do not explain things in a simple manner – sometimes they use arcane esoteric language purposefully so that they can charge you a lot of money or they don’t understand the subject well enough.

IRS Notice CP14 is an automated system notice that one usually gets after about 3 – 4 weeks from the date of filing your tax returns. In this case, the reader filed the taxes for 2014 on 10/15/2015 and the Notice date is 11/16/2015 (so about 4 weeks).

Simply stated – IRS Notice CP14 states that the taxes you owed (per your calculations) have not been paid yet. There is underpayment of taxes – tax reported on your return is more than the payments that have been made to your account. This usually is accompanied by interest and penalty charges too.

Payments that have been made to your account

This is not always the same as the payments that you have made. Continue reading

Big difference between death and taxes

Only two certain things in life are death and taxes. Really? Are taxes certain? 100% certain? How about I show you how ‘uncertain’ taxes are? Contrary to the popular belief, you can control a lot about taxes. Specifically, you can control the magnitude or the timing or both.

Let us first talk about the magnitude – not all ‘income’ is taxed equally.

Think about it like this – you need $100 every day. If all of it comes from ‘wages’, then simplistically speaking you would need to earn wages of $166. But if the same $100 for your every day needs was coming from capital gains, you would only need capital gains of $125. So capital gains of $125 affords you the same $100 that $166 of wages do.

The above assumes that you are in the top tax bracket, where the wages tax rate is 39.6% and capital gains tax rate is 20%.

(Important note: how did I calculate the exact dollar numbers mentioned above? I used ‘Goal Seek‘ function capabilities within What-if analysis  section of Excel – my favorite feature of Excel, a must-learn feature).

Now let us talk about the timing

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