With year-end approaching, tax planning becomes a key factor, particularly considering possible tax changes following the recent election. It’s impossible to predict the full landscape of changes that might occur in 2017 or beyond. However, now’s the time to take stock of both current and potential future opportunities.
Here are our top recommendations and related potential tax changes based upon current tax reform plans under consideration. We encourage you to contact us to discuss these and other end-of-year strategies before December 15th. This ensures you have time to think, plan and act, as most tax planning must be implemented before December 31st.
1. Maximize Your Retirement Plan Contributions
One of the best ways to reduce your taxable income is through pre-tax contributions to a company retirement plan, a self-employed retirement account, or an IRA. Contributions to a company plan could gain you an immediate return if your company offers a matching program. Traditional contribution limits are as follows, for 2016 and 2017. Please contact our office with questions, or if you’re self-employed.
| Plan Type | Contribution Limits1 2016 | Contribution Limits1 2017 |
| 401(k)2, Solo 401(k), 403(b), TSP Elective Deferrals | $18,000 | $18,000 |
| Age 50+ Catch-up | $6,000 | $6,000 |
| Solo 401(k) & SEP IRA Plans | $53,000 | $53,000 |
| Simple Elective Deferrals | $12,500 | $12,500 |
| Age 50+ Catch-up | $3,000 | $3,000 |
| Traditional & ROTH IRAs2 | $5,500 | $5,500 |
| Age 50+ Catch-up | $1,000 | $1,000 |
1 Subject to income limitations.
2 Contributions to Roth accounts do not reduce your current year taxable income, but all future earnings and withdrawals are exempt from future taxation.
Planning Tips:
• If you receive an employer matching contribution, you might need to spread your contributions throughout the year to qualify for maximum benefits.
• If you’re self-employed and considering a solo 401(k), the account must be established before year-end.
• Individuals age 50 and older must make formal elections to take advantage of catch-up contributions.
2. Take Any Required Minimum Distributions (RMD)
If you’re 70 ½ or older, or have an inherited IRA, be sure to avoid penalties by processing your Required Minimum Distribution before December 31.
3. Minimize Capital Gains
Minimizing capital gains and realizing investment losses can help to reduce your tax burden. We always review investment accounts on behalf of clients, and encourage individuals to do the same across any personally managed accounts. If you sell an asset at a loss, you can’t re-purchase the same or any ‘substantially identical’ investment for 30 days, or you risk triggering a wash sale and foregoing the loss. However, you might be able to find a replacement investment that’s a little different, so that you can stay invested while also capturing a tax benefit.
Planning Tips:
• Currently, moderate to high income earners are assessed an extra investment income tax of 3.8% on interest, dividends, and capital gains. This tax could be modified or eliminated if tax reform occurs. If you’re in the middle or upper tax brackets, you could benefit by deferring capital gains until 2017. Investment risk and opportunity should always be considered in tandem with tax planning.
• Individuals in the low income brackets currently pay zero tax on long-term capital gains. Tax reform could impose new capital gain taxes, albeit at low rates. If you’re in the 15% or lower tax bracket, this could be an ideal year to realize long-term gains, taking advantage of a zero tax structure while it lasts.
4. Charitable Contributions
If you’re charitably inclined, tax-deductible charitable contributions can help to reduce your taxable income. Contributing appreciated securities can further leverage the benefits of your giving objectives, as you not only receive a tax deduction for making the gift, but also avoid a future capital gain tax liability from your investments. The charitable organization gets the same benefit, but they don’t owe taxes when they receive and sell the shares. Just remember to replenish your investments with cash to stay invested, as appropriate.
Planning Tip:
• Current tax discussions include lowering the upper income tax brackets and increasing the standard deduction. If you’re exposed to the top tax brackets or if your itemized deductions are relatively low (less than $15,000 for singles and $30,000 for married couples), you could benefit by accelerating charitable giving in 2016. Tax planning is strongly recommended to ensure you’re aware of itemized deduction phase-outs, deduction limits and more.
5. Income Fluctuations & Estimated Tax Payments
If your income has changed in 2016, or if you make estimated tax payments, we recommend careful planning before year-end to determine if your taxes are potentially over- or under-paid, and if any estimated tax payments might be due. Accelerated payment of your estimated state tax payment before December 31st could afford you additional itemized deduction benefits in tax year 2016. Conversely, it could also trigger Alternative Minimum Tax (AMT) exposure. Year-end planning helps to set a confident course.
Planning Tip:
• If you’re not subject to AMT or itemized deduction phase-outs, you might consider accelerating your state estimated tax payments in 2016 to gain greater deductions. This could lower your 2016 taxable income and afford greater tax savings under two scenarios:
o If you’re in the top tax brackets, you could be in a lower tax bracket in 2017 or thereafter.
o State income taxes are one of many itemized deductions considered for elimination under various tax reform plans.
6. Health Spending
Medical expenses are one of many itemized deductions you can claim to reduce your taxable income. You can deduct only the amount of your total medical expenses that exceed 10% of your adjusted gross income, or 7.5% if you or your spouse is 65 or older.
Planning Tip:
• If you foresee medical expenses in 2017, you might benefit from accelerating them in 2016 for two reasons:
o This is the last year that a lower adjusted gross income threshold of 7.5% applies to medical deductions for individuals age 65 or older. Current tax law increases this threshold to 10% in 2017, making it more challenging to claim medical deductions. If you’re age 65 or older and foresee medical expenses, you might benefit by accelerating them in 2016.
o Medical deductions are one of many itemized deductions considered for elimination under various tax reform plans.
7. Health Funding
Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) allow you to pay for medical expenses using pre-tax dollars. While unused dollars in HSA accounts can accumulate as retirement savings, be sure to use FSA residual balances before year-end. While some FSA plans now allow a small carryover amount, the majority operate on a ‘use it or lose it’ premise. This might also be the time of year when you have to make elections for next year. Check with your employer or Human Resource Department.
8. College Funding
If you have children, grandchildren, nieces, nephews or friends for whom you would like to contribute towards their college savings, you might wish to consider establishing and/or funding a college savings plan before year-end. We often recommend 529 plans. These offer tax-deferred savings, increased annual gifting limits, and state tax deductions in many states.
9. Business Planning
Business owners are always advised to consider year-end tax planning opportunities such as timing of expenditures, personal compensation decisions, employee benefit offerings, and more. If you own a business, we encourage you to contact your accountant to discuss specific planning opportunities. We are also available to help plan and potentially prioritize among competing tax, business, and personal decisions.
Planning Tips:
• In the event that tax reform lowers the upper tax brackets in 2017, you might be in a position to take advantage of such a change through two strategies:
o Accelerating business expenses in 2016 could help to reduce your taxable income and shelter exposure to the higher tax brackets.
o Deferring billings and receipt of income into 2017 could also help to shelter tax exposure in the event that you might be subject to lower tax brackets in 2017.
Note: Risk factors should always be carefully considered.
10. Roth IRA Conversions
Considering a Roth IRA conversion is particularly important if you project this to be a low or negative income year. Any amount you convert triggers taxable income, but offsetting business losses or a low income tax year might allow you to convert some amount with little to no tax cost. The amount converted remains tax-free, giving you a lifetime tax-free savings bucket.
11. Family Gifting
There are a variety of ways to provide economic benefits to your family members, while also maximizing tax advantages for yourself:
• Individuals can transfer up to $14,000 per person for 2016, without triggering gift tax or taxable reporting requirements. We’re happy to discuss gifting considerations with you, relative to your own financial security and broader family objectives.
• Section 529 educational savings plans offer tax-deferred savings, increased annual gifting limits, and state tax deductions in many states.
• Larger gifting transfers require more advanced strategies and consideration of future tax changes that could alter your decisions.
Planning Tip:
• Current tax reform discussions include the possibility of altering or eliminating estate taxes. Such changes could have a significant bearing on your gifting decisions. We’re happy to discuss current year gifting elections relative to your family wealth transfer objectives and tax planning considerations.
12. Trust Income & Distributions
If you’re the trustee or beneficiary of a trust, be sure to carefully review net trust income and distribution elections. Some elections to distribute income to the beneficiary can defer into early next year, but it’s better to be prepared, especially as trusts reach the top IRS tax bracket of 39.6% at the lower threshold of $12,500 income.
As your wealth grows, end-of-year financial decisions become increasingly significant and complex, especially in light of year-end deadlines and this year’s potential for sweeping reform in the New Year. We encourage you to contact us to discuss how comprehensive and proactive planning can benefit you and your family.
NOTE: All references to tax reform changes are based upon current information available. Changes are likely to occur, and risks should be considered relevant to your planning decisions and actions.
Prepared by SageVest Wealth Management. Copyright 2016
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