As we turn our minds to gratitude this time of year, we should all be grateful the government didn’t take it all. I thought I would summarize some of the year’s hot topics in taxation and provide some opportunities to review your year-end tax plan while there is still time to impact this year.
Keep in mind that the goal of year-end tax planning is to lower your tax bill over the current year and the next year. The overall impact in 2016 and 2017 should be considered.
If you expect to be in the same or lower tax bracket in 2017, consider accelerating your write-offs and deferring taxable income.
Accelerating write-offs for Itemized Filers
Consider mailing your state and local tax payments in December instead of January when due. This allows you claim the deduction in 2016.
Consider paying the January 2017 mortgage payment in late December. This will let you write of January’s interest in 2016.
Make charitable contributions before the end of the year. They must be postmarked or charged by December 31st to get the 2016 treatment. Consider giving appreciated property as the unrealized gains will not be taxed.
If you have medical expenses that are approaching 10% of your Adjusted Gross Income (7.5% for seniors), consider getting elective procedures and paying for them before year-end. Medical costs above the threshold are deductible. For seniors, the threshold changes from 7.5% to 10% of AGI next year.
If you have the flexibility on most of your itemized deductions, you can stack your itemized deductions into one year and take the standard deduction the next year. Assuming you have the flexibility to do so, you may save taxes for both years overall.
If you own a business, you can purchase capital equipment and take advantage of accelerated depreciation or expensing. Don’t let the asset purchases exceed 40% of your total year’s purchases though or you can’t take advantage of the accelerated depreciation.
Beware of the Alternative Minimum Tax (AMT). This tax applies if it exceeds your regular tax liability and is 26% for the first $186,300 of AMT income and 28% above that amount.
If you have capital loss carryforwards, go through your portfolio and harvest gains. The loss carryforward will absorb the gains and prevent them from being taxed.
If you own a business, consider delaying invoices to time the payments received to occur into the next year. This lowers your 2016 revenue.
Consider paying your vendors in 2016 for bills that are due in 2017. This increases your expenses and lowers your income.
If you are 70 ½ or older and must make IRA distributions, consider transferring up to $100,000 from your IRA to charity. The distribution counts towards your annual required distribution but is not taxed to you (you also don’t get the charitable contribution). This can keep a big chunk of retirement income off your return.
If you turned 70 ½ in 2016, you can defer your required distribution until April 15, 2017. This one time election does keep income out of 2016 but may also put two distributions into 2017.
Sometimes the current year tax rate is lower than future year’s tax rates. If this is the case, you may consider converting all or part of a traditional IRA to a Roth IRA. You will recognize a gain in the current year income but the assets will now be allowed to grow tax free.
Trump Tax Plan and The Future
Like it or not, we have a new president elect and a congress that is in the same political party. This means that there is a strong possibility that we may see some or a lot of tax reform in the next couple of years. While Trump’s tax plan still requires a lot of details to be filled in, here is what he would like to do.
Individual tax rates would be reduced at almost every income level. He proposes condensing the current seven tax rates into three: 12%, 25% and 33%. For a married couple the 12% rate would run to $75,000, the 25% to $225,000. Single filers would have half those dollar amounts.
He has put forth a 15% business tax rate that could also apply to self-employed individuals.
He would increase the standard deduction to $30,000 for married filers and $15,000 for single filers. The head-of-household filing status would be eliminated. He would limit itemized deductions to $200,000 for couples and $100,000 for singles.
Capital gains rates would stay at the current maximum 20% rate. He would eliminate the Net Investment Income Tax of 3.8% and 0.9% that current high income filers pay.
He has also suggested getting rid of the AMT and the estate and gift tax and providing tax advantaged accounts for child and elder care.
We are still unsure of what will be changed, added or deleted from the current tax code, but we believe that we will see action on addressing the tax code during the first two years of his presidency.
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