2016 Year End Tax Planning

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Is it really possible that 2016 is almost over?  Looking back over previous articles, last year’s tax planning one came to mind and I’ll put it out there again with a few more additions.  Here are things to consider before midnight on December 31 rolls around:

  • Adjust Withholdings:  If you had a significant increase (decrease) in income, change in marital status or dependency exemptions, it’s very important to adjust withholdings for these changes especially if a big year end bonus is coming your way.  Not paying enough during the year can trigger an underpayment penalty.  Paying too much is an interest free loan to the government.
  • Bunch Miscellaneous Itemized Deductions:  If you itemize deductions and have large amounts of unreimbursed employee expenses, lawyer fees attributed to alimony or other taxable income related items, or tax preparation fees it’s a good idea to check if you will make it over that 2% income threshold to take the deduction.  If your close, expenses can be bunched for the 2016 tax year by paying for them with cash or CC by Dec. 31.  If you are subject to AMT, this deduction may not be beneficial to you.
  • Open and Fund Retirement Accounts: If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA. The deadline to open a SIMPLE IRA was Oct. 1, but you can still open an individual 401(k), Roth or traditional, until Dec. 31. The contribution deadline varies by type of entity. The deadline to contribute to other retirement accounts is usually April 15, or whenever you file your taxes, but there is some variation among types of accounts. If your 401(k) or 403(b) is through your employer, your deadline for contributions is Dec. 31. If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA.
  • Organize Your Materials:  I can’t stress enough how important it is to have your tax receipts and statements organized whether digitally or by paper before you sit down to prepare your tax return.  Here is a post about it.
  • Decide who will Take Dependents: If parents are divorced, decide now who will take the dependency exemption as only one can.
  • Spend Your Flex Spending Account Money: In most FSAs, only $500 of unused funds may be rolled over to the next calendar year and a use-it-or-lose-it rule is in place for anything above that amount.
  • Give to Charity: Now is a good time to donate to your favorite charity (ies) not only for the benefit of helping others but also for the potential tax savings.  If you itemize your deductions, donating to a charitable organization-501(c) may lower your tax liability.
  • Accelerate Deductions or Delay Income: Make your mortgage payment early, pay property taxes, tuition, medical bills or other deductible expenses now to increase this year’s deductions – unless you’d be better off financially deducting those items next year. You might also be able to delay bonuses or other income until next year if that’s a better move.
  • Balance Capital Gains with Losses: If you have capital gains from stock or other asset sales, look at your portfolio to see if it makes sense to sell an asset that has a loss to offset your capital.
  • Give Gifts from Your Future Estate: If you want to reduce the estate tax liability for your heirs, look to give them a gift now.  Gifts to an individual in a calendar year up to $14,000 ($28,000 for a married couple) are tax free for both the giver and receiver.  Gifts made directly to educational institutions for higher learning and medical bills paid directly on behalf of someone else are also tax free.