1. Set aside time to plan
Effective planning requires you to have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances could change next year. There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31st, so best not to procrastinate. We can help you plan. Mike McVay, Tax Accountant 850-725-5696
2. Defer income to next year
Consider opportunities to defer income to 2017, particularly if you think you may be in a lower tax bracket in the coming year. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone paying tax on the associated income until next year.
3. Accelerate deductions
Look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, rather than paying them in early 2017, could make a difference on your 2016 return.
4. Factor in the AMT
If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes probably won’t help your 2016 tax situation, but could hurt your 2017 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year-end moves could help save you from making a costly mistake.
5. Bump up withholding to cover a tax shortfall
If you’re going to owe federal income tax for the year, especially if you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered to have been paid evenly through the year, rather than when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments.
6. Maximize retirement savings
Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2016 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year end.
7. Take any required distributions
Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from your traditional IRA(s) and/or employer-sponsored retirement plan(s) (an exception may apply if you’re still working and participating in an employer-sponsored plan). Take any distributions by the date required – the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
8. Weigh year-end investment moves
Remember not to let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of these gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
9. Beware the net investment income tax
Don’t forget to account for the 3.8% net investment income tax (NIIT). This additional tax applies to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).
10. Get help from a professional
There’s so much to think about when it comes to tax planning. It often makes sense to review your specific circumstances with an experienced financial planner who can help you evaluate your options and determine if any year-end moves make sense for you.
Mike McVay, Accountant 850-725-5696 Mike@MikeMcVay.com