Year End Tax Tips

Moves to Consider to Get Your Tax Bill Just Right

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Sitting down with a calculator or a software program to figure out what you owe Uncle Sam is nobody's favorite time of the year. But here's some good news — you have a wide range of tactics at your disposal to make sure your 2016 tax bill is no more than it has to be. 

Figuring out which tactics make the most sense means analyzing your current finances, estimating your tax situations for 2016 and for 2017, and identifying financial transactions that might take place either this year or next year.

Analyzing Your Current Finances

This begins with tallying up your income, your expenses and your savings for the year to date and anticipating what they'll be for the remainder of the year. Of course, if you're preparing your 2016 tax return after the first of the year, you should have all the data for 2016 at your fingertips.

Now estimate what you anticipate your income, expenses and savings will be in 2017. 

What Are You Looking For? 

You can use this information in a variety of ways. First, it will identify your marginal tax bracket for 2016, and tell you what it's likely to be in 2017. Will it remain about the same, or are you in a higher tax bracket in one year than the other? If you anticipate being in a lower tax bracket next year, consider shifting year-end income to after the first of the year if it's not too late. If you have a choice between using a certain deduction in one year but not both — this isn't the case with all deductions, but it can happen — consider moving the deduction to the year when you're in the higher tax bracket so it will do you the most good.

If you're not sure about when you can take a certain deduction, check with a tax professional to make sure. 

Next, you'll want to identify your adjusted gross income or AGI for 2016 and again for 2017. Many deductions and credits have phase-out thresholds — if you earn more than this amount, you either can't claim them or you can only claim a reduced credit.

Is your AGI in either year approaching the phase-out limits for any deductions or credits you may be eligible for? If so, consider ways to shift income or boost adjustments to income to keep your AGI at your desired target.

Now it's time to do a little homework. Are there tax breaks you can take in 2016 that won't be around in 2017? Some popular deductions and credits come up for renewal periodically and it's up to Congress to pass measures to extend them — otherwise, the tax breaks expire. Some tax breaks set to expire at the end of December 2016 include: 

  • The Tuition and Fees Deduction: This allows you to deduct qualifying tuition and associated educational fees for yourself, your spouse or your dependent up to $4,000 through 2016. This is what's called an "above-the-line" deduction so you don't have to itemize to claim it and it has the effect of lowering your AGI. This can be helpful if you're concerned with phase-out limits of other credits. 
  • The Residential Energy Property Credit and the Nonbusiness Energy Property Credit: These credits reimburse you for a portion of what you spend making certain energy-efficient improvements to your home through 2016. 
  • The Deduction for Mortgage Interest Insurance Premiums: You have to itemize to claim this one, but you can deduct payments you make for homeowners insurance premiums and/or home mortgage interest. Unfortunately, this deduction won't be available in 2017, either. 

    Make these payments before the end of the year if you're eligible for any of these tax breaks. If you wait until the calendar flips over to 2017, they won't help you tax-wise. 

    Other Flexible Financial Transactions

    You have control over a few other financial transactions as well. You can make them either before year's end or after the start of 2017. These include: 

    • Charity donations
    • Selling stocks, bonds and other investments
    • Roth conversions
    • Taking 401k and IRA distributions
    • Paying state estimated taxes or property taxes
    • Adjusting contributions to a 401(k) or similar retirement plan

    Specific Year-End Tax Moves to Consider

    Here are a few things to consider when you're handling income at year's end: 

    Type of incomeLowering Your IncomeIncreasing Your Income
    Wages
    • Boost pretax contributions to your 401(k) or similar retirement plan to reduce your income. 
    • Ask if a year-end work bonus can be paid out next year instead of this year. 
    • Hold off on exercising incentive stock options.
    • Work overtime, ask for a raise, reduce pretax retirement contributions, shift retirement contributions to an after-tax Roth 401(k) or Roth 403(b). 
    • Exercise incentive stock options.

    Business Income

    • Spend on tax-deductible expenses such as equipment and supplies.
    • Make payroll tax deposits this year instead of waiting until the Jan. 15 deadline so you can deduct Q4 payroll tax this year.
    • Hold off on sending out invoices and collecting on accounts receivable until next year.
    • Identify business losses that can offset other income. 
    • Review retirement plans and consider setting up a solo 401(k) before the end of the year. 
    • Send out invoices and try to collect on outstanding accounts receivable by the end of the year.
    • Wait to spend money on business expenses until January.
    Capital Gains and Losses
    • Use installment sales or like-kind exchanges to defer gains to a future year. 
    • The 39.6 percent tax bracket begins at $415,050 for single filers and $466,950 for married couples filing jointly in 2016. Long-term gains that fall within this tax bracket are taxed at 20 percent instead of 15 percent, and they may be subject to the 3.8 percent net investment income surtax as well. 
    • Consider "loss harvesting." Sell off positions with unrealized losses to reduce taxable gains.
    • Be careful about repurchasing investments sold at a loss within 30 days. This can create a wash sale.
    • Hold off on selling profitable positions until next year.
    • Ensure that carryover losses apply to short-term gains whenever possible. 
    • Rebalance your portfolio across tax types for utmost tax efficiency. 
    • Consider "gain harvesting." Sell any long-term gains to fill up taxable income to the top of the 15 percent bracket. Such gains will be taxed at zero percent.
    • Sell any long-term gains to fill taxable income to the top of the 35 percent bracket. Such gains will be taxed at 15 percent. 
    Retirement Distributions
    • If you need to withdraw a substantial amount from a retirement plan, figure out if it's better to take the money this year versus next year, or spread out the tax impact by withdrawing some this year and some next year.
    • Take required minimum distributions (RMDs) by the end of the year.
    • If you turned 70½ years old in 2016, your first RMD should be taken by April 1, 2016, but you can delay it until the year after you turn 70½. Figure out if it's more advantageous to take the RMD this year or to take two RMDs next year. 
    Converting Pretax IRA to an After-tax Roth IRA

     

    • This increases your taxable income in the year of conversion.
    • You can undo a conversion by April 15 or Oct. 15. This makes sense if the tax cost is low enough compared to the expected future tax cost. 
    Social Security Benefits 
    • Earning more income can mean that more of your benefits will be taxable. 
    Passive Losses From Rentals and Businesses
    • Figure out if your passive losses will be limited or deductible this year. If so, passive losses can offset other income. If not, the losses roll forward.
    • Consider increasing your passive income to use up your loss carryovers.

    Net Operating Losses

    • Exercise carry back/carry forward options to offset income in other years.
    • Increase income to absorb the losses. This makes the additional income tax-free up to the extent of the loss. 

    These tips can help you handle expenses at the end of the year:

    Type of ExpenseAccelerating ExpensesDeferring Expenses

     

      
    Itemized Deductions

     

    • Figure out if you can or should itemize this year and/or next year by comparing the total of your itemized deductions to the standard deduction for your filing status. 

     

    • If it makes more sense to itemize next year instead of this year, identify expenses that can be moved to 2017. 

    Medical, Dental, and Health Care 

     

    • Only medical, dental and health care expenses in excess of 10 percent of your AGI are tax deductible. The extra 2.5 percent break for taxpayers age 65 or older, bringing the threshold down to 7.5 percent, is set to expire at the end of 2016. 
    • If you're close but under the 10-percent-of-AGI threshold, consider paying additional medical expenses before the end of the year to get your deduction over the threshold. This way, you'll at least get a bit of a deduction rather than none.
    • If you're over the threshold, additional medical spending will be deductible.
    • If you know that you'll have significant medical expenses in 2017, look into whether you can pay your medical bills next year instead. By "bunching" your medical expenses into one year, you may be able to get over the 10-percent-of-AGI threshold.
    State estimated taxes
    • Pay your state estimated taxes by the end of the year to deduct them this year. This only works if you are or will be able to itemize and you're not subject to the alternative minimum tax. 
    • Hold off on paying your Q4 state estimates until January if it will be more advantageous to deduct them on your 2017 return.
     
    Property tax
    • Pay your next property tax installment before the end of the year to deduct it this year. This only works if you are or will be able to itemize and you're not subject to the AMT.
    • Pay your next property tax installment in 2017 to deduct it in 2017.
    Charity
    • Donate cash by Dec. 31 to deduct the donation this year.
    • Donate non-cash goods such as clothes, furniture or vehicles by Dec. 31 to get a deduction this year.
    • Consider a Donor Advised Fund if you want to give but you're not sure which charity you would like to donate to. 
    • Postpone donations until next year if the deduction will produce bigger tax savings in 2017.
    • Pick the right year so the charity generates the most tax savings.

    Here are a few considerations about saving money at the end of the year:

    401(k) or 403(b) Retirement Plans
    • Contributions for employee contributions for 2016 must be made by Dec. 31 or deferred from your last paycheck of the year.
    • Decide how much you want to set aside from each paycheck so you're ready to go in January for 2017 contributions.
    • Decide how much to allocate for pretax traditional and/or after-tax Roth accounts for 2017.
    Traditional IRA
    • Contributions for 2016 tax year are due by April 17, 2017, so topping off your IRA can wait until next year if necessary. 
    • Determine how much, if any, of your traditional IRA contributions will be tax-deductible.

    Roth IRA

    • Contributions for tax year 2016 are due by April 17, 2017.
    • Determine how much, if any, you are eligible to contribute to a Roth IRA.
    • Consider funding a Roth IRA and taking the Saver's Credit if you're eligible. 

    Other Things That Changed in Tax Year 2016

    Here are a few other updates to keep in mind when you're making all these decisions.

    • Personal and dependent exemptions are $4,050 each for the 2016 tax year.
    • The standard deduction remains the same as it was in 2015 for all taxpayers except those who qualify to file as head of household. Their deduction rises to $9,300 in 2016.
    • The foreign earned income deduction increases to $101,300.
    • The annual deductible amount for contributions to Health Savings Accounts increases to $6,750 for family accounts in 2016, but it remains the same as in 2015 for individuals. 
    • Itemized deductions phase out for individuals with incomes of $259,400 or more in 2016, and at $311,300 for married couples filing jointly. Itemized deductions are reduced by 3 percent at these income levels.