Here are a few tax planning tips to help reduce taxable income for 2016. It’s not too late to utilize some of these strategies.
- You can accelerate deductions and defer income- for example, make an extra mortgage payment before the end of the year or put off that bonus until 2017. The former exemplifies an increase in deductions while the latter is an example of reduced 2016 income.
- Sometimes you can bunch itemized deductions to exceed a threshold that will then result in a reduced tax liability. The best example of this is probably medical expenses. These have to exceed 10% of your AGI before they produce a deduction on your Schedule A (itemized deduction form). If you know you are going to be close to that number, and you need a medical procedure, schedule it for 2016 so that the cost of that procedure is deductible. Or, there is a 2% AGI threshold for miscellaneous expenses which include professional fees like legal advice or tax planning or other unreimbursed business expenses you may be incurring, such as travel.
- It’s getting late for this one but you can file a new W-4 with your employer and boost your withholding for the last few paychecks.
- Of course, you can always add more money to a retirement account. 2016 contribution limits are $18000 for a 401(k) and $5500 for an IRA (more if you are over age 50).
- If you converted a traditional IRA to a Roth IRA in 2016 and the account value went down, you can reverse that conversion and you have up until the extended deadline to make that change. You could then convert later and pay less tax on that transaction.
- Charitable deductions are very common. Just remember that any cash contributions must be documented in some fashion. If you claim more than $500 in donations of property, Form 8283 must be filled out and accompany your tax return. If you claim more than $250 for a car donation, you will need written acknowledgment from the charity that received the vehicle.
- If you are taking RMD’s (Required Minimum Distributions) from your IRA, you might consider contributing that amount directly to a charity. This will reduce your AGI and is very helpful for those that don’t itemize and the contribution still counts toward the satisfaction of your minimum RMD for the year.
- Reduce your taxable estate by giving up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new gift tax exclusion each year. Both you and your spouse can combine your gift and give up to $28,000 to a single beneficiary.
If you need help determining if any of these are appropriate or beneficial, please give us a call. Always glad to help.