Important Tax Items to Consider Before Year End

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Published by Taylor Financial Group

This week, we have a little bit more to say than usual.  But for good reason!  Now that the end of 2016 is quickly approaching, it is important to make sure you are doing everything you can to maximize your “cash in pocket,” which includes reducing your taxes.  

Here are some things to consider and some ways we can help.

Potential Tax Loss Harvesting & Offsetting Substantial Realized Gains

A year-end review of your investment portfolio can often reveal unforeseen opportunities to reduce taxes.  If losses exceed your gains (or you don’t have any gains to offset), you can use up to $3000 of losses to offset ordinary income.  Unused losses can be rolled over to future years.  If certain investments are underperforming, selling now enables you to harvest those losses to offset the gains in other places.

 Strategically deferring the sale of other investments with gains until the next year can minimize spikes in taxable income now.  There may be other options for managing capital gains from stock sales and dividends.  Even if you don’t have losses to harvest, you may be able to cash in some of your top performers tax free.  Taxpayers in the 10% or 15% tax bracket still qualify for a 0% long-term capital gains rate.  Keep in mind, too, that if your state has an income tax, you may owe state taxes on your capital gains, even if Uncle Sam turns a blind eye.

IRA Contributions & Fully Funding Retirement Plans

If you do not yet have an IRA, or other retirement savings account, you can open one now, giving you an immediate opportunity to manage your tax burden.  Since taxes are deferred on these accounts until they are cashed out, any extra income that can be put into tax deferred accounts between now and the end of 2016 will reduce your taxable income for the year, as well as start building wealth for the future – a win-win.  If your income declined this year – because you retired, for example, or took an unpaid sabbatical – consider whether this is the time to convert some or all of the funds in your traditional IRA to a Roth before year-end.  You must pay tax on the amount you convert (except for any after-tax contributions), but if you’re in a lower bracket now than you’re likely to be in later years, it can really pay off.  Once you convert, future earnings are tax-free, as long as you’re at least 59½ and have owned the Roth for at least five years when you withdraw the money.  To get the maximum amount of tax-free growth, use money from outside your IRA to pay the tax bill.

And don’t forget to fully fund your 401(k) or other employment sponsored retirement plan.[i]

Taking Required Minimum Distributions (RMDs)

You cannot keep retirement funds in your account(s) indefinitely.  A Required Minimum Distributions (RMD) is the minimum amount you must withdraw from your account each year.  The deadline for RMDs is April 1st of the year following the year you turn 70½, and December 31st of each year thereafter.

You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½.   However, Roth IRAs do not require withdrawals until after the death of the owner.  And, remember, you can withdraw more than the minimum required amount.  Also, your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

Gifting & Charitable Giving

Have you considered making a year-end tax-deductible donation to one or more of your favorite charities?  There could also be additional philanthropic opportunities such as donor advised funds and charitable trusts (see below).  In addition, you can give away up to $14,000 per person per year without paying gift tax, and can go beyond with additional planning.  This strategy effectively removes taxable estate value while transferring some money to friends and loved ones.

For the first time in years, retirees won’t have to wait for Congress to renew a valuable tax break for charitably inclined IRA owners.  Last December, Congress made permanent a law that allows seniors age 70½ and older to donate up to $100,000 from their IRAs directly to charity.  The contribution counts toward your required minimum distribution and isn’t included in your adjusted gross income.  That could qualify you for tax breaks tied to your Annual Gross Income (AGI) and reduce or eliminate taxes on your Social Security benefits.

 Although you can transfer up to $100,000 from your IRA, even small donations will lower your AGI.  It’s a useful tax break for seniors who no longer have enough deductions to itemize.  For taxpayers who do itemize, another tax-smart strategy is to give appreciated securities to charity. As long as you’ve owned the securities for more than a year, you can deduct the value on the day you make the donation.  You won’t pay taxes on the gains, and the charity won’t, either.

As mentioned above, you may also be interested in setting up a charitable trust, like a Charitable Lead Trust (CLT) or Charitable Remainder Trust (CRT), both of which can be structured to benefit both charities and loved ones while removing taxable assets from the estate.  A CRT is an irrevocable trust that generates a potential income stream for the donor to the CRT (or other beneficiaries) with the remainder of the donated assets going to a favorite charity or charities.   A CLT first donates a portion of the trust’s income to charities and then, after a specified period of time, transfers the remainder of the trust to the beneficiaries.  This strategy, too, can reduce taxes in the long term.  If you won’t fall into the 10% or 15% tax bracket, perhaps someone in your family will, an adult child for example, or an elderly parent.  In that case, appreciated stocks make great gifts.  The family member (or anyone else you want to help) can sell the securities and use the 0% rate as long as they still fall in the 10% or 15% bracket.

Consider Pre-Paying Expenses

If you have one or more kids in college, pre-paying the spring semester may be an attractive option. One such provision is the American Opportunity tax credit, which is designed to offset the cost of tuition, fees and textbooks during each of a student’s first four years of undergraduate education.  The credit is worth up to 100% of the first $2,000 spent on qualifying expenses and 25% on the next $2,000, for a total maximum of $2,500 for each qualifying student.  Married couples filing jointly qualify for the full credit if their modified adjusted gross income is $160,000 or less.  For single filers, the cutoff for a full credit is $80,000.  Married couples with MAGI of up to $180,000 and single filers with MAGI of up to $90,000 can claim a reduced amount.  A credit represents a dollar-for-dollar reduction in your tax bill, so this tax break could save you a bundle.  If you haven’t spent enough this year to take full advantage of the tax credit, consider paying your child’s January tuition bill before December 31st.  You can claim the credit only for money you actually spent this year, not the amount that you were billed.

 Another option to reduce taxes is pre-paying a mortgage in December. By paying January’s mortgage payment before December 31st.  You may be able to deduct that extra interest in 2016, further reducing tax burden (but discuss with your tax advisor first as to beware the AMT kicking in).

Mortgage Debt Forgiveness

If you’re negotiating with your mortgage lender to sell your home for less than you owe on the mortgage, be sure to get the contract signed before December 31st.  Ordinarily, forgiven debt is taxable, but Congress extended through the end of this year a provision that excludes from taxes up to $2 million in forgiven mortgage debt on a principal residence.  The exclusion will apply to mortgage debt forgiven in 2017, if the agreement to discharge the debt is signed in 2016.

Flexible Spending Accounts

Use it or lose it!  If you have a Flexible Spending Account (FSA) for out-of-pocket healthcare expenses, any unused money becomes taxable at the end of the year.  If you have been meaning to get some dental work done or buy new prescription lenses, doing it now to lower the account means lower taxes next spring.

Energy Efficiency Saves Money

This year is your last chance to claim a tax credit for installing new energy-efficient windows or making similar energy-saving home improvements, unless Congress renews the provision.

Teachers Alert!

Congress made permanent a provision that allows elementary and secondary school teachers to claim a $250 above-the-line deduction for out-of-pocket classroom expenses, such as books and supplies.  While the tax break won’t expire, if you want to claim the full $250 deduction on your 2016 tax bill, you should stock up before year-end.

Deduct Sales Tax Now

If you live in a no-tax or low-tax state and plan to buy a car or boat in the near future, making the purchase by year-end will let you add the sales tax on the big-ticket purchase to your deduction.

 It is important to understand how your situation could affect your taxes.  We have covered some important key items here, but we want to make sure you know all of your options.  Please call us if you have any tax questions or if you would like us to review your financial situation to determine how we might be able to help you save on taxes.  Don’t wait until the end of the year!


[i] Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  None of the information contained herein is meant as tax or legal advice. Tax laws are complex and subject to change. Please consult the appropriate professional to see how the laws apply to your situation

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC a Registered Investment Advisor. LPL Financial is under separate ownership from any other named entity.

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