2016 Year-End Tax Strategies 

WHAT WORKS FOR YOU, THE INDIVIDUAL TAXPAYER                                 

The general rule has always been to defer income and accelerate expenses, but there are times when this just doesn’t work.  Coming up with the right mix can be challenging but opportunistic as well.  As you get closer to year-end the picture becomes a bit clearer. Remember, individuals are cash basis taxpayers, so it’s too late after December 31st to take advantage of most strategies.  

Your first step is to compare your current year tax situation to last years.  Is there anything that can be done to move you to a lower tax bracket or shield you from the other taxes; the alternative minimum tax (AMT), net investment income tax (NII), the additional Medicare tax or the higher tax bracket for capital gains?
A few tools in my proverbial toolbox to help keep your income under the thresholds that cause these other taxes to kick in are:

  • Maximize your contributions to those 401(k) Plans and other retirement accounts.
  • Harvest capital losses against ordinary income up to $3,000; more bang for the buck than harvesting them against capital gains taxed at a lower rate.
  • Contribute to a Health Savings Account (HSA) if you qualify, a current year page one deduction that you can use like an additional IRA for medical expenses. Don’t use the account to pay current medical expenses and save up the contributions to help pay for those copays, prescription drugs and Medicare Supplement Plans in retirement.

These tools help lower your adjusted gross income (AGI).  Lowering AGI yields big benefits since AGI is used in calculating limits and phase outs of certain deductions, exemptions and credits available in the calculation of your tax bill.  Once lost, they may be gone for good.
My favorite tool is the ROTH conversion. You convert traditional IRA funds to a ROTH IRA account and pay the tax on the amount converted currently.  This is a great strategy when you have a decline in income in a given year. And if you find that it was a mistake, you can get a “do-over” or reprieve.  You can reconvert the amount by the due date of your return and have no tax consequences.  It’s just like it never happened.
Don’t forget to look at how your 2016 current year tax strategies may affect your 2017 tax bill. You may have some control over taking income in one year or the next. For instance, take a bonus on January 1st of the next year instead of December 31st of this year. And which year would be best to sell those appreciated assets, cash in those U.S. savings bonds or take a lump sum as opposed to an installment contract on property you sell. 
Bunching deductions in one year versus another can also lower your tax bill.  If you don’t have the cash, you can pay with a credit card and still take the deduction.  For example, if you don’t quite have enough deductions to itemize, you can make two-year’s worth of deductions in one and then take the standard deduction the following year.  Here are some things you can do:

  • Make those charitable contributions every other year by writing the check on January 1st and December 31st of the same year.
  • Pay that February quarterly real estate tax bill and your 4th quarter state estimated tax payment on December 31st, that’s if you’re not subject to AMT.
  • Payment for medical services upfront (i.e. orthodontia program) can help you meet that threshold for taking a medical deduction.

Surprises when it comes to taxes are rarely a good thing.  And there are enough calculations, tables and worksheets to make your head spin.  You don’t need an exorcist.  You need a CPA to lead you through the maze.  We’re here to help with your tax planning as you need us.
Featuring Guest Blogger
Darlene Shaffer, CPA/ABV/CFF, CVA

908-782-7900; ext. 110

Raymond James is not affiliated with and does not endorse the opinions or services of Darlene Shaffer or Bedard, Kurowicki & Co.  Raymond James and its advisors do not offer tax advice.  Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax free withdrawals are permitted.  Additionally, each converted amount may be subject to its own five-year holding period.  Converting a traditional IRA into a Roth IRA has tax implications.  Investors should consult a tax advisor before deciding to do a conversion.  The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete.