Year-End Tax Planning For 2016
By Evelyn M. Joiner, CPA, CDFA™
It’s almost that time of year again . . . tax time. Smart tax planning now can help reduce the taxes you owe not just this year, but in the coming year, too. Review these items with your accountant before the end of the year to maximize your savings.
Defer or Accelerate Income
Determine your tax bracket. If you are currently in a high tax bracket and you believe you will be in the same bracket or a lower bracket next year, look for ways you can defer your income until next year. Wage or salary workers may be able to do this by having a bonus deferred. The self-employed can delay billings. Retirees who’ve obtained the age of 70 ½ during the year can delay their first required minimum distributions (RMD) until 2017.
On the other hand, if you are currently in a lower bracket than you expect to be next year, you want to maximize your income this year to take advantage of the lower tax bracket. In this case, accelerating income to be sure it’s received in 2016 may be a smarter move.
Contribute the Maximum to Retirement Accounts
Tax-deferred retirement accounts compound and grow tax-free. If your employer offers a 401(k) plan, you can contribute up to $18,000 ($24,000 if you’re age 50 or older) pre-tax. That is up to $18,000 you do not pay taxes on this year – a potential huge savings! Depending on your income and other retirement contributions, you may be able to contribute to an IRA up to $5,500 ($6,500 if 50 years or older). For those that are self-employed, there are several options available, but most plans must be established by December 31 so you need to start now. A self-employed individual may be able to contribute up to $53,000 ($59,000 if 50 years or older) to a plan such as a solo 401(k), which could save $25,000 or more in federal and state income taxes!
Review Your Investment Portfolio
Considering selling investments? Talk to your accountant, now may be the time to do it. For instance, if you are in the 15% tax bracket, you will pay 0% on long-term capital gains – that’s, zero percent, meaning you do not pay long term capital gains And, if you’re in a higher tax bracket, it may still make sense to sell those investments now, especially if your income continues to climb.
If you’ve incurred capital gains during the year, look into selling loss investments to offset the gains. Capital losses can offset capital gains dollar for dollar. After that, you can deduct up to $3,000 of capital losses to offset ordinary income.
Remember; do not let taxes get in the way of a good financial decision. Discuss these strategies with your financial and tax professionals before making any changes to your investment portfolio.
If you itemize deductions and plan to make charitable contributions, be sure to do so before the year ends to get a deduction this year. If you think you’ll be in a higher tax bracket next year, those deductions may be more valuable if deferred until January 2017.
Donations of appreciated stock, or property other than cash, has the double benefit of getting a deduction for the fair market value of the property, while avoiding paying capital gains tax on the appreciation.
If you are retired and required to take a required minimum distribution (RMD), you can have your RMD paid to a qualifying charity. This allows you to meet your RMD requirements without paying tax on the distribution! This is a good strategy for a taxpayer that no longer itemizes their deductions.
Consider the above as just some of the many tax-planning strategies your accountant can review with you. Consideration of the timing of income and deductions proves vital in reducing the overall tax liability both this year and next year. Be sure to review your taxable income and deductions with your tax professional before making these decisions and it’s too late.
Evelyn M. Joiner, CPA, CDFA™ is a partner at the firm of Sparano, Vincelette & Joiner, CPAs in Wilmington. She started her accounting career in 1999, obtained her Master’s degree in Taxation, and is the only CDFA™ in Delaware who is also a CPA. You can find her on LinkedIn at http://lnkd.in/dqjQm3y.