As we get closer to the end of yet another year, it’s time again to give some thought to year-end tax planning. Here are some things to consider before the end of the year to help reduce your tax burden. Overall, think with a multi-year outlook. This will help make sure the planning you do for 2016 won’t negatively affect future years.
Review estimated federal income tax and make adjustments where necessary. If it looks like you are going to owe income taxes for 2016, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. If your 2015 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2016 or 110% of the tax shown on your 2015 return during 2016 to avoid an estimated tax penalty.Tip: If you expect to owe state taxes, you may want to consider paying your state taxes by the end of the year. An individual taxpayer can claim a deduction for state taxes paid in the calendar year on their federal tax return. But watch out for the Alternative Minimum Tax (AMT)! If you are subject to AMT, accelerating your state tax deduction may not provide a tax savings. There’s a good chance you’ll be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, have exercised incentive stock options, or have recognized a large capital gain this year.
If you have poor-performing stocks or bonds, sell them by year-end and deduct the loss. Do you have stocks, bonds, or other securities that aren’t doing well? If you can sell them this year, you can claim them as a capital loss that can be used to offset capital gains. The government allows you to match up your capital gains and losses for any given year to determine your “net” capital gain or loss. You can claim up to $3,000 in net capital loss each year ($1,500 if married, but filing separate) to offset ordinary income. This is one of the best deductions available to investors.
Play the “long game” if you can. If you have stocks or bonds that are doing well, owning them for at least 366 days will qualify you for the “long-term capital gains” tax rates, which are generally lower than ordinary income tax rates. In contrast, if you sell after owning them for less than 366 days, they are considered “short-term gains” and are taxed at your regular rate. Hold on to them if you can.Note: While the tax consequences are important, they should not be the only consideration for making investment decisions.
Maximize employer-sponsored tax benefits. If you have a 401(k) plan at work, it’s just about time to tell your company how much tax-free income you want to set aside next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free” money when you fail to participate to the max for the match.If your employer offers a flexible spending account arrangement for your out-of-pocket medical or child care expenses, or a health savings account for medical expenses, make sure you’re maximizing the tax benefits during the upcoming enrollment period for 2017.
Eyeing new equipment or thinking of upgrades for your business? Do it now. If you own a business and were planning to purchase new (or used) property (machinery, equipment, vehicles, software, etc.) you should consider doing so before year-end. There are two ways to save money with qualified business purchases: the Section 179 deduction and bonus depreciation deductions.Both new and used equipment are eligible for a Section 179 expensing election of up to $500,000 for eligible business property. The benefit begins to phase out if total purchases are $2,010,000 or more. The property has to be placed in service by the end of the year to claim the Section 179 deduction in 2016. In addition to Section 179 deductions, you can claim bonus depreciation deductions equal to 50% of the cost of most new qualifying business equipment placed in service by the end of the year.
Make charitable contributions direct from an IRA (if you are at least 70 ½ years old). If you have reached age 701/2 and are charitably inclined, consider making charitable donations directly from your IRA. This is often a better option than the more traditional approach of taking a taxable distribution from an IRA and then making a deductible charitable contribution because AGI (Adjusted Gross Income) is not increased by the taxable distribution. As AGI increases, potentially more could be owed on social security benefits, itemized deductions can be limited and Medicare insurance premiums can increase. This benefit is limited to $100,000.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.