We are approaching the end of 2016, and attention should now turn to, what else, year-end income tax planning. The end of the year should be used to review your tax situation and determine what, if anything, can be done to minimize your income tax bill come April 2017.
There has not been much income tax legislation this year, nor is there expected to be any significant legislation prior to year-end. Thus, we are left with the tried and true planning methods. I will briefly discuss several of the planning techniques to take into consideration.
Please note that these techniques are time sensitive, meaning they must be done by the end of 2016.
Have you maxed out your retirement account contributions? For 401(k) contributions, the 2016 limit is $18,000 for those under 50, and those aged 50 and older are allowed an additional $6,000 in “catch-up” contributions. Review your year-to-date contribution and project out to the end of the year. If you are not contributing the maximum, consider increasing your contribution.
If you are thinking about making charitable contributions, do so before the end of the year. When determining what assets to contribute, consider giving appreciated securities that you have held for more than a year. The tax deduction will be the full fair market value of the security, and you will not have to report the appreciation as income.
If you are over 70½, have an IRA, and do not need the required minimum distribution, think about making a gift to a charity from your IRA. Taxpayers are allowed to transfer up to $100,000 from their IRAs to charity and not report the income. The transfer will also count toward the minimum required distribution. The downside of this is that you do not get a charitable contribution deduction.
Are there any other deductions you can accelerate? Such as the state income tax deduction. If you anticipate a state tax liability for April of 2017, consider paying it before the end of the year. You will be able to take the deduction on your 2016 federal return versus waiting a whole year for the tax benefit. However, be careful of the dreaded alternative minimum tax (“AMT”), which can increase your federal income tax liability. If you are subject to the AMT, you will not receive a tax benefit for state taxes paid.
Review your portfolios to determine whether you have capital gains for 2016. If so, consider selling stock with embedded losses to offset these gains. In addition, you can deduct up to $3,000 of capital losses against ordinary income. If you repurchase the loss stock, watch out for the wash sales rule that prohibits you from taking the loss if you repurchase the security within 30 days before and after the day of the loss sale.
Business owners should consider additional spending. If your business is profitable and needs new equipment, consider purchasing the needed equipment before the year-end. Provided that you fall within the requirements of Internal Revenue Code Section 179 you will be able to expense 100%, up to $500,000, of the cost of the new equipment, even if you finance the purchase. Generally, Section 179 requires that the deduction cannot exceed the taxable profits and that current year assets purchases do not exceed $2,000,000. For every dollar of assets purchased over $2,000,000, the allowable Section 179 deduction is reduced by $1. Therefore, if you purchase more than $2,500,000 of assets in a year, the allowable Section179 deduction is reduced to zero.
Bonus depreciation, which allows for the expensing of 50% of qualified property, is also still available in 2016. The remaining 50% of the property not depreciated may be eligible for the 179 expensing discussed above.
With these techniques in mind, be sure to give your tax situation a final review before the end of the year so you can potentially save some money.