Year-End Tax Planning
With the end of the year quickly approaching, now is the time to make any last-minute moves that can improve your tax position. Additionally, if President-elect Donald Trump follows through on his promise to significantly reduce tax rates for both individuals and businesses, there are some tax-shifting strategies you may want to consider.
With a Republican majority in both houses of Congress, the president-elect is in a strong position to enact legislation that will reduce tax rates effective January 1, 2017. However, it’s important to keep in mind that the current personal income tax rates of 10, 15, 25, 33, 35, and 39.6 percent are still in effect for the tax returns being filed next year. This holds true for corporation tax rates as well.
Deferring income/accelerating expenses
With the possibility of tax rates being lower next year, it might be worth it for individuals to consider deferring some income into 2017. That may mean getting a bonus in January, instead of December, or waiting to redeem a savings bond. Additionally, individuals may want to think about paying next year’s first property tax installment or making a charitable contribution that they planned to make in 2017 before the end of this year. Please keep in mind that some of these expenses may be limited by the Alternative Minimum Tax (AMT).
Businesses should contemplate buying fixed assets like computers and equipment prior to year-end to take advantage of Section 179 expensing. Cash-basis companies can also charge business-related expenses on their credit cards in December, pay the bill in January, and still take the deduction for 2016.
Be aware of your AGI
Certain tax benefits like itemized deductions, personal exemptions, and education and adoption credits get phased out depending on a taxpayer’s adjusted gross income (AGI). So, deferring income in to 2017 may make sense if these write-offs can be maximized.
The PATH Act of 2015
This year is unique: the Protecting Americans from Tax Hikes (PATH) Act brought some certainty to year-end tax planning by making permanent many tax incentives that previously were annually extended.
Individuals
The PATH Act made a number of tax incentives permanent for individuals like:
- The American Opportunity Tax Credit. The credit is for qualified education expenses paid for a student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.
- The teacher’s $250 classroom expense deduction.
- The ability to deduct state and local sales tax instead of state income taxes.
- If you’re over 70 1/2, the PATH act made permanent your ability to exclude from income up to $100,000 of distributions from your IRA directly to a qualified charity.
Businesses
The PATH Act extended or made permanent a number of tax incentives for businesses like:
- Section 179 expensing on certain fixed assets has been permanently set at $500,000 and an investment limit of up to $2.01 million. Both amounts are indexed for inflation, and are available for assets placed in service up to December 31.
- Bonus depreciation on new assets was extended but includes a phase-down over a four-year period. The amount remains at 50 percent for 2016 and 2017, but drops to 40 percent in 2018 and 30 percent in 2019.
- 15 year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements was made permanent.
- Charitable deduction for the contribution of food inventory was made permanent as well.
Max out retirement accounts
If your employer offers matching. then maxing out contributions to a 401(k) is pretty much a no-brainer. Even if your company doesn’t offer matching, deferring income in 401(ks) and IRAs still make a lot of sense.
Tax-loss harvesting
Even in this current bull market, your portfolio may contain some duds; but they still can be useful. If you have large amounts of taxable capital gains in 2016 you may want to offset some of those by realizing losses on some of these losers to lower your overall capital gains.
