As we get closer to year end, this is a great time to review some potential moves to help minimize your 2016 taxes and put less stress on your wallet come April 2017.
- Postpone income until 2017 while accelerating deductions into 2016. Lowering your adjusted gross income may enable you to benefit from more of your deductions, credits, and other breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). Postponing income is a good strategy for those taxpayers who anticipate being in a lower tax bracket next year as a result of reduced earnings, lower capital gains or other drop in income.
- Profitable businesses should consider buying machinery and equipment before year end. The 2016 maximum deduction under IRS code section 179 for the purchase of fixed assets is $500,000. A reduction to this amount starts to take effect when property placed in service in the tax year exceeds $2,010,000 (the investment ceiling) so you have to monitor the maximum amount spent. This expensing limit increases to $510,000 in 2017 and the investment ceiling limit also increases to $2,030,000.
- Check your 2016 realized capital gains on any sales of stock, bonds, real estate, etc. Then check to see if you have other investments with unrealized losses. You can sell some or all of those investments before year end to offset your realized gains. If you sell securities and still like the investment for the long haul you can buy it back as long as you wait a month and a day to do so.
- Be sure to take your annual required minimum distribution (RMD) from an IRA or qualified retirement plan. Failure to withdraw your annual RMD can result in a penalty of 50% of the amount you should have taken but didn’t. Be careful if you are turning or turned 70 ½ in 2016 because this is the longest you can delay taking your first RMD.
- If you inherited an IRA from a decedent who died in 2015, and if there are multiple designated beneficiaries (determined as of September 30, 2016), it could be to your advantage to create and fund separate inherited IRA accounts before December 31, 2016.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year. This doesn’t save on income tax but may save you or your estate current or future gift and estate taxes. In 2016 you can give $14,000 each to an unlimited number of individuals without gift tax implications or filing requirements.
- You may want to make a year-end charitable gift in order to take the deduction in 2016. Make your cash contributions before December 31, 2016. If you write a check, the date you mail or deliver it will be considered the date of the gift but if done close to the end of the year be sure to send by certified mail. If you are short on cash after the holidays you can use a credit card to make the gift. The gift is treated as made when the charge is made, not when you pay the bill, so you can accelerate the deduction without using cash.
Remember, each individual and business is different and can only be evaluated by your tax advisor.
For more tax planning strategies contact your LSL Advisor.