Year-End Tax Planning - December 2016

Create a tax-saving plan to reduce your 2016 tax bill

Contrary to what you may have heard, there is one sure way to reduce your tax bill: Create a tax-saving plan. And here’s more good news – you still have time to establish and implement your plan before the end of the year. Consider these suggestions as you put your plan together.

Make use of tax deferral strategies

Participating in a retirement plan is a tax deferral strategy with a double benefit. You get to put off paying federal income tax on money you earn currently and you can also put off paying tax on the income earned on the money you deposit in your plan. That’s true for a plan you participate in at work, such as a 401(k), a plan you establish for your own business, such as a Simplified Employee Pension (SEP) plan, and an account you set up with income earned from wages, salaries, and tips, such as an Individual Retirement Account (IRA).

Investors can employ the tax deferral strategy too. A simple method is to wait to sell investments that have appreciated in value until your holding period exceeds a year. At that point, you can benefit from long-term capital gain rates, which generally max out at 20%. Alternatively, you can wait to sell until you can offset gains with losses from other investments. Of course, you’ll want to balance this tax-saving strategy with sound investment decisions.

Reduce your taxable income

On your personal income tax return, expenses you can deduct “above-the-line,” standard or itemized deductions, and allowable exemptions for yourself and your family members can all reduce your taxable income. For example, if you’re a teacher, you may benefit from the $250 above-the-line deduction for expenses you pay out of pocket such as books and supplies. In addition, this year you can also deduct your expenses for professional development. Above-the-line means the deduction is available even if you don’t itemize.

This is also a good time to sum up your outlays for expenses that qualify as itemized deductions. These include taxes, home mortgage interest, and charitable contributions, and are generally deductible in the year you pay them. Totaling how much you’ve already paid will show you if you have enough to itemize, or if you might want to consider accelerating or postponing expenses to shift the deductions into the current or future year, whichever gives you the bigger tax benefit.

Tip: If you’re age 65 or older, under current law, 2016 is the last year the 7.5% threshold for medical expenses is available. Starting in 2017, your medical expenses will need to exceed 10% of your adjusted gross income in order to claim a deduction. If you’re close to meeting the threshold this year, you may want to renew prescriptions before the end of the year, or schedule routine doctor visits.

Are you a business owner? Changes to the Section 179 depreciation expensing election can help you claim bigger deductions this year. One change to be aware of is an expanded definition of Section 179 property, which now permanently includes computer software and real property such as qualified leasehold and retail improvements, and restaurant property. Another change to note: Air conditioning and heating units are now eligible for Section 179 expensing.

Benefit from credits

Credits can reduce your personal and business taxes dollar for dollar – one reason they’re valuable enough to warrant giving special attention to the details. As an example, if you plan to claim the American Opportunity Tax Credit or other education credit this year, be aware you’ll need a copy of the information statement (Form 1098-T) sent by your school. This year, schools are generally required to report on Form 1098-T only the tuition and qualified expenses that you actually paid. However, you may buy books and credit-eligible materials from a supplier other than your school. Those costs would not be on the Form 1098-T that you receive. To include the expenses in the calculation of your tax benefit, keep receipts as proof of your payments.

Some “green” cars still qualify for federal tax credits too. When you buy a new personal or business plug-in electric drive vehicle in 2016, you may qualify for a credit of as much as $7,500. Eligible vehicles include cars, light trucks, and motorcycles. In general, the vehicle must be under 14,000 pounds and powered by a rechargeable electric motor. There’s also a credit for fuel cell motor vehicles, which are powered by cells that convert chemical energy into electricity. The base credit is $4,000 for vehicles weighing less than 8,500 pounds.

Avoid penalties

A good way to save tax dollars is to avoid paying extra because of missed deadlines or mistakes, including the underpayment of federal estimated tax. If you receive income not subject to withholding such as alimony or rent, verify that you’re on track to pay estimates that total at least the smaller of 90% of the tax for 2016 or 100% of the tax shown on your 2015 return. Special rules apply when your income exceeds $150,000.

Don’t want to make estimated payments? If you have earned income, increasing the amount withheld from your paycheck between now and the end of the year can help avoid a penalty. If you’re married and both working, remember to account for the 0.9% Medicare surtax when your joint income exceeds $250,000.

Wrap up tax benefits for year-end charitable gifts

Generally, you can deduct the full amount of contributions you make to a qualified charitable organization, up to 50% of your adjusted gross income for the year. Did you make a large contribution? You can carry the excess forward for five years. Just remember that you have to get written acknowledgment from the charity for monetary gifts of $250 or more.

Tip: A contribution made by credit card late in the year is still deductible if posted to your account this year. You can charge an online donation on December 31, and take a deduction on your 2016 return, even if you don’t pay the credit card bill until 2017.

Looking for more tax planning opportunities? Contact us to schedule a year-end tax review and to explore additional options tailored to your specific circumstances.

2016 Tax Rules – A Quick Review

Income tax rates

For 2016, ordinary federal income tax rates range from 10% to 35% unless taxable income exceeds $415,050 for singles or $466,950 for married couples. The rate on income above those amounts is 39.6%.

Estate & gift tax

For 2016, you can make annual tax-free gifts up to the $14,000 per-gift limit. The estate tax exemption for 2016 is $5,450,000, with a top rate of 40%.

Tax breaks that are now permanent

1) The optional deduction for state and local sales tax in lieu of state and local income tax; 2) the $250 deduction for classroom supplies paid by teachers; and 3) IRA-to-charity transfers of up to $100,000 by taxpayers 70½ or older.

Itemized deductions and personal exemption phase-outs

For 2016, itemized deductions and personal exemptions are limited for single taxpayers with adjusted gross income (AGI) above $259,400 and married couples filing jointly with AGI above $311,300.

Alternative minimum tax

The exemption amount for 2016 is $53,900 for singles and $83,800 for married filing jointly.

Accelerated depreciation rules

You can expense up to $500,000 for new and used equipment, and claim 50% bonus depreciation for new assets.

Capital gains & dividends

Long-term gains are taxed at 15% for most taxpayers. The rate is zero percent for those in the 10% and 15% ordinary income brackets, and 20% for those in 39.6% ordinary income bracket.

Affordable Care Act  surtaxes

The Medicare surtax of 0.9% is imposed on wages and self-employment income exceeding $200,000 for singles and $250,000 for married couples. The 3.8% net investment income tax is imposed on unearned income for singles with modified AGI exceeding $200,000 and for couples with modified AGI exceeding $250,000.

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This memo is intended to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional advice. If you have questions about your 2016 tax planning and for details and guidance in applying the tax rules to your individual circumstances, please contact us at 717-267-2100.


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