This year-end planning guide aims to provide you with information and planning tips to assist you in understanding and making the most of the laws affecting your tax situation. Using the guidance in this article will help ensure that you retain the tax benefits to which you are entitled and protect the wealth you have created. Below we look at some new tips based on the tax law changes of 2016 – and then revisit some tried and true tactics.
Here are some items to consider as we close out the 2016 tax year and move into filing season.
- Retirement Giving and Planning: Remember that Qualified Charitable Distributions are back on the table. These have been permitted on an on-again, off-again basis since 2007. QCDs allow taxpayers who are 70½ or older and have a traditional IRA to make charitable donations of up to $100,000 out of the IRA.
- Research and Development Tax Credit: Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) tax liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e. FICA) liability.
- IRC Section 179 Limits: This special rule allows for immediate expensing of qualified property up to $500,000 (with phase outs beginning at $2,010,000 dollars). Beginning in 2016, the limits are also indexed for inflation.
- Bonus Depreciation: The bonus deprecation percentage is 50% for property placed in service during 2016. Generally, qualified property must be purchased new (such as new equipment). However, qualified property may include certain qualified improvement property and certain trees, vines, and plants bearing fruit or nuts when planted.
This past year did not see a substantial number of significant changes to tax rules, and as a result, you may benefit most from revisiting the tried and true strategies and tactics, including the following.
- Prepayment of State Taxes: Consider paying your fourth-quarter estimated income taxes prior to December 31st. However, if you are in AMT, don’t worry about paying your fourth–quarter state estimated tax payment until after the year ends since you won’t get to deduct it as an itemized deduction anyway. Just make sure to pay it by January 16, 2017 to avoid interest and penalties.
- Tax Loss Harvesting: If you are thinking about selling taxable assets (such as stocks or bonds), consider taking action before December 31st so the losses are available to offset other sources of capital gains – and potentially up to $3,000 of ordinary income.
- Home Equity Refinancing: Do you already own a home or plan on buying one? Do you also owe debts that are not deductible? If both are true, then consider the potential advantages of paying off the non-deductible debt by either financing a larger portion of the new home or taking out a home equity loan on your existing residence.
- Out-of-Pocket Charitable Donations: You may not be allowed to deduct your time or the value of services you donate to charity; however, you can deduct out-of-pocket expenses related to charitable activities such as mileage on the use of your own car.
- Donation of Appreciated Securities: In lieu of cash, consider contributing appreciated securities held for more than one-year directly to charity. You receive a donation for fair market value of the securities and you avoid capital gains tax.
- Backdoor Roth IRA Conversion: Many taxpayers cannot contribute directly to a Roth IRA because their income is too high. However, consider making non-deductible IRA contributions and simultaneously converting to Roth IRA prior to December 31st. However, if you have existing IRAs, contact your tax advisor to make sure this strategy is suitable for your tax situation.
Remember that while there are no major changes anticipated between now and the end of 2016, there is no guarantee of what may happen. Use this guide as a starting point for a dialogue with your tax professional to ensure that you plan now the upcoming tax filing season.