When I started my own business many years ago, I set up a SEP-IRA to help fund my retirement. From that point on, I received year-end letters from my accountant, attorney, and pension consultant. Most of it was boilerplate stuff outlining changes to the tax code—dense and dry reading.

I was sure these letters weren’t for me until something about business expenses and retirement-plan contributions caught my eye. So I called my accountant for an explanation. Wow! I made the change we discussed before year-end and saved a few thousand in taxes. Since then I’ve read those letters with a bit more interest, looking for any needle in the haystack that could save me money.

With Christmas chaos in full swing, I suspect many of you would rather spend the next couple of weeks doing anything but read bone-dry letters from your accountant. So I’m highlighting recent changes that may affect many of our readers. There’s no reason to pay one penny more than the law requires.

And of course, if you think any of these changes or strategies apply to you, be sure to check with your tax professional.

Deductions for Medical Expenses

If you itemize, you can deduct medical expenses that exceed 10% of your adjusted gross income. If you or your spouse is over 65, the threshold is 7.5%.

If you think you’ve exceeded that threshold, pay as many medical bills as you can before year-end so you can take the deduction this year. If you know you won’t exceed the threshold, push what you can into 2015.

As an example, I need some dental work done. I asked the dentist what would happen if we scheduled it in early January instead of December. He said, “No problem.” So January it is.

For those of you with encore careers, you have an additional consideration. This is straight from the Internal Revenue Service’s website:

Medical care expenses include the insurance premiums you paid for policies that cover medical care or for a qualified long-term care insurance policy covering qualified long-term care services. ….

If you are self-employed and have a net profit for the year, you may be able to deduct (as an adjustment to income) the premiums you paid on a health insurance policy covering medical care including a qualified long-term care insurance policy covering medical care for yourself and your spouse and dependents.

One of the benefits of an encore career is the opportunity to deduct certain items without surpassing the 7.5% or 10% threshold.

Investment Income

Readers can also review the essential information on capital gains and losses. Here are the tax rates for long-term gains and dividends (not earned income) for a married couple filing jointly:

  • Under $73,800: 0
  • $73,800-$457,600: 15%
  • Over $457,600: 20%.

Additional information for single people or married people filing separately is available here.

If you have losses that exceed your gains, you’re allowed to deduct up to $3,000 as a tax loss under certain circumstances. Any additional loss may qualify as a loss carryforward to future years. If you have a loss carryforward from a previous year, it can be used to offset some of your current gains.

The conventional wisdom, sometimes called “tax selling,” is to check where you stand from a tax perspective. You may decide to sell something at a loss to offset gains if you’re above the threshold, or vice versa.

If you have a stock that’s showing a gain that you want to keep, you may consider selling it, offsetting the gain against any losses you might have, and then rebuying it. Just remember that the 12-month long-term gain meter starts over when you do that.

Retirement Plans

Diligent retirement savers can look forward to increased contribution limits for the 2015 tax year:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), and most 457 plans is increasing from $17,500 to $18,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is increasing from $5,500 to $6,000.

Sad to say, though, the IRA contribution limit will remain unchanged for the 2015 tax year at $5,500. The additional catch-up contribution limit for individuals aged 50 and over will stay the same at $1,000.

If your employer makes matching contributions to your 401(k), now is a good time to remind yourself that this is free money. Don’t let it sit on the table.

The Roth Rollover

The fundamental difference between a Roth IRA and Traditional IRA is the tax treatment. You can deduct your contribution to a traditional IRA from the current year’s income. The money in the account grows tax-free. When you take it out, the distribution becomes taxable.

You cannot deduct your contributions to a Roth IRA. However, the money also grows tax-free, and when you take a distribution, it is not taxed.

It’s possible to roll over your traditional IRA into a Roth. I’m a strong believer that you should roll over to a Roth and buy out your business partner (the government) as soon as you can. You may find your CPA does not agree with me on this, however.

If you’re considering rolling over your traditional IRA into a Roth IRA, take a moment to read Doing the Roth Arithmetic by my colleague, Terry Coxon. It’s the best, easy-to-read resource on the topic.

Age Considerations. As a general rule, if you make a withdrawal from a tax-deferred retirement account before age 59.5, you’re going to pay taxes and penalties. If at all possible, do not do this. You want to keep your money growing tax-free as long as possible.

When you reach age 70.5, you must take a required minimum distribution from your traditional IRA. There are no mandatory Roth withdrawals until the death of the owner.

It’s a good idea to draw down non-tax-deferred accounts before you dip into accounts growing tax-free.

Side notes on rollovers. When you take money from a 401(k) or a traditional IRA and roll it into a Roth, the amount you withdrew is taxable income. With a Roth, earnings can be withdrawn tax-free beginning on the first day of the fifth taxable year after the year the Roth IRA was established. Don’t take it out earlier, or you’ll be subjected to the early distribution penalty.

When rolling into a Roth, the tax does not have to be paid from the proceeds. I have a friend who sold his business, rolled over his entire (substantial) account into a Roth, and paid the taxes from the proceeds of his business sale. He found the tax treatment of Roth accounts very appealing even though he plans on keeping most of it intact for his heirs.

A common situation occurs when you retire and receive a lump-sum payout of your 401(k). If you roll it all into a Roth at once, you could easily find yourself in the 39.6% tax bracket. Remember, it must stay in the Roth for five years or you could be subjected to an early withdrawal penalty.

Open a Roth account as early as you can so that the five-year meter starts ticking long before you may have to use the money. Then continue to roll over portions of your traditional IRA and 401 (k) in smaller amounts to minimize the income tax consequences. Why roll it over all at once and pay 39.6% if you can do it at a lower rate?

On the Lighter Side

Phew! That was a lot of tax talk. Now it’s time for something free. We’ve just released a new special report, The Truth About Bonds; you can download your complimentary copy here. In it you’ll find everything you need to know about investing in bonds in the current climate.

And finally…

Jo and I are spending the holidays with four generations of our family, and we can’t think of anything more wonderful. On behalf of the entire Miller’s Money team, I’d like to wish everyone a safe and happy holiday season.

Merry Christmas!