Tax Planning for the 2016 Year-End

In the midst of this holiday season, there are a variety of tax (yes – unfortunately, it is time to think about taxes!) considerations that you should give a second look to before the clock strikes midnight on December 31st!

Depending on your tax situation, some and/or all of these ideas might present an opportunity – either now or down the road – whereby in reducing your income taxes, the dollars saved may allow you to meet other financial objectives that are important to you and your family.

Generally speaking, deferring income (into 2017) and accelerating expenses (into 2016), is a key tax planning strategy. Further, with PETUS Trump’s administration taking shape, politics will definitely be front-and-center as tax policy evolves in the coming 2017 tax year. Forecasters are anticipating a decrease in income tax rates, with possible caps on allowable deductions; therefore, timing – as previously mentioned – becomes an all-the-more important concept to consider further.

So, what should you be thinking about as the month of December arrives? Below are a handful of the countless tax planning tips that might be relevant to your tax situation:

1. Life Events: Did 2016 bring about a life event for you – i.e. marriage, children, divorce, death, new home, sale of home, new job, new business venture, caring for an elderly parent, etc.? Keep these in mind as you consider your year-end tax moves, as these events could make your tax picture look a bit different than it did last year.

2. Mutual Fund Purchases: Mutual funds are required to pay out capital gains to investors, and even if the payout is considered a return of capital (and reinvested), you do have to pay taxes on the payout. If you are considering getting into a fund, wait until after the fund makes its year-end distribution in December.

3. Employer Retirement Plans: Generally speaking, maximizing a contribution to your employer’s retirement plan will always be a plus; especially, if your employer provides for a matching element to the contribution as paid by you. However, if you had more than one employer in 2016, and contributed to both of the employer’s retirement plans, be cognizant of the contributions made to each – i.e. if excess contributions were made, there could be tax ramifications.

4. Purchase of Business Equipment: For your trade/business, if you are looking to purchase a large piece of equipment, consider accelerating that purchase into 2016, to take advantage of available Section 179 deductions (maximum allowable deduction for 2016 is $500,000).

5. Qualified Charitable Contributions from Individual Retirement Accounts (IRAs): Thanks to tax legislation passed in 2015, this provision of the tax law has been made permanent. If you are age 70 ½, up to $100,000 can be contributed to public charities; thus, allowing the distribution to be excluded from income. With the exclusion from income, other limitations (that generally apply) are favorably affected, as well.

6. Prepayment of Deductions: While the Pennsylvania individual income tax rate is relatively low, the same does not hold true for property taxes; as such, you may find that you are historically subject to Alternative Minimum Tax (AMT). However, if you are not subject to AMT, consider prepaying your taxes (e.g. 4th quarter Pennsylvania estimated tax, real estate, other local taxes, etc.) on/prior to December 31, 2016, so as to secure the tax deduction in 2016. Too, consider accelerating your January 2017 mortgage interest deduction by prepaying it in December 2016.

7. Charitable Contributions: With PETUS Trump’s tax proposals, we could be seeing a limit on itemized deductions in upcoming years. If you have plans of making a charitable contribution after the first of the year, consider accelerating that contribution to 2016. (Limitations may apply if you are a high-income taxpayer.)

8. Wage Withholding: The Social Security wage base for 2016 has been $118,500. If you had more than one employer in 2016, you may have excess FICA withholding to consider – i.e. representing a benefit to you of additional taxes paid towards your Federal tax account.

9. Education Credits: As the better option of the education benefits available, the American Opportunity Tax Credit (AOTC) could put up to $2,500 back into your pocket – some of which may be a refundable tax credit (limitations apply). Tax legislation in 2015 made this a permanent tax credit available to taxpayers.

10. Contribute to a Section 529 Plan for Education: Establish and fund a Section 529 plan, where the assets will grow tax-free, if the funds are used to pay for qualified education expenses. While such a contribution is not deductible for Federal purposes, Pennsylvania allows for a deduction of up to $14,000 per beneficiary, per taxpayer, per year basis, up to the amount of taxable income.

All said, this is a very short list of all that could be available to you!

Please join Amy on Friday December 9th, at the Greater Scranton Chamber of Commerce offices, to learn about further opportunities.