2016 Year-End Tips
Happy Holidays Everyone!
I hope this email finds you and your family well, and hopefully you are enjoying the holiday season. It is a great time to spend with loved ones, but also to work hard in meeting some last minute goals set for the year. For me, it is a time when I want to reach out to all my wonderful and loyal clients to give you some tax saving ideas before the end of the year to do some last minute planning. I will be sending you another email at the start of the new year with more company news and important tips on preparing to get your taxes together for our annual visit.
ear-End Tax Tips
1) Changing of the Guards – As you all know, like it or not, we will be seeing new leadership starting in the new year as a new regime takes over. With the Republicans dominating the White House and Congress, there leaves little doubt that there will be an overhaul to our tax system as we know it in the coming years. While we don’t know for sure what is ahead until it happens, we do know that the tax code for 2016 and 2017 will not change.
2) Defer, Defer, Defer! – Republicans are historically known for keeping income taxes relatively low, and given what changes Trump has already proposed, it seems like rates will fall. As it has typically been a mainstay in tax strategy, deferring income to later years may now be a better strategy than ever.
3) Accelerate, Accelerate, Accelerate! – Deferring income is only part of the solution. Accelerating deductions is the other. Many of you have bills that are due at the beginning of January, such as a mortgage payment, real estate bill, 4th quarter estimated tax payment to the state or local government. If you pay it in January, then you’ll have to wait a whole other year to see the tax benefit of that payment. Instead, if you pay it December 31st, it become this year’s deduction that will have an immediate impact in only a few short months. Most of us are cash-basis taxpayers, which means we deduct items when we pay them, not when we incur them. So simply moving up a payment a week or two can give us some quicker returns to our cash flow through our tax return.
4) Retirement Plan Contributions – It has been no secret that taxpayer’s have not historically done a great job at saving enough money in today’s dollars to live the lifestyle they want in retirement. Typically, a person needs about 60% of their current income in retirement, but that largely must come from earnings and not the principle part of their savings. With Social Security being exposed for its limitations as a retirement solution (and becoming more and more unreliable), and people living longer than they ever have before, there is a real concern of not having enough to live on and outliving your retirement benefits. The end of the year is a great time to review your retirement accounts that you have through work or done independently to make sure you have saved enough for the year. Chances are that you are not maxing out your potential for the year. Going over your budget and seeing where you are cash flow wise can give you great insight into your ability to save. If you are investing in a tax deductible plan (qualified), such as a Traditional IRA, SEP IRA, Regular 401(K) or Regular 403(b), then it isn’t actually costing you dollar for dollar to put that money away because of the tax savings. If it is a work plan adjust your contributions at any time to make a larger, one-time contribution from your salary. For the independent plans (Traditional or ROTH IRAs), or Business Plans (Solo 401(k)s or SEP IRAs), not only can you save before the end of the year, but most allow you up until the filing season deadline (April 18th) to put money away and it still count for 2016.
5) Review your Market Place Insurance – Many of you that purchased health insurance through the marketplace qualified for a subsidy. The subsidy may have been based on your income from 2015, because that is what most people used as a benchmark. The problem may be that your income wasn’t what you said it was. If your income increased because of working more hours, increase in pay, or perhaps other types of transactions that generated income, such as selling assets (stocks, bonds, real estate) or distributing money from a retirement account, this could have a negative effect on your subsidy. If your higher income would have precluded you from getting that subsidy (either less or none), you will have to repay the subsidy in the form of a tax when you file your return. It is important to review what the marketplace believes your income to be relative to reality. It is important to contact the marketplace and update your income information whenever something changes so that you do not have issues later on. It may also be a time when implementing strategies to lower your income may not only save you on tax dollars, but will also assist you in preserving your subsidy, or perhaps even qualifying you for more.
- Contributing money to a tax deductible retirement account
- Selling off depreciated assets for a loss
- Buying additional equipment to lower your profit and/or increase your loss for your business.
6) Donate! – Giving money and/or noncash items is something that is great for the cause, and certainly something that makes you feel good inside , but we all wish that we could get a tax benefit as well.
- If you are over 70 1/2 and have at least one IRA, then you know you have a responsibility to take out your Required Minimum Distribution (based on value and life expectancy) before the end of the year. Chances are that you are retired and your itemized deductions are low (house paid off and low state and local taxes due). You still want to contribute to your favorite charity in a tax preferential way. You can direct up to $100,000 per year tax free, no itemization necessary. Speak to your the Custodial company of your IRA for further details
- Contributions of Food Inventory – you and/or your company that has food inventory can donate to a qualified charitable organization and receive a larger deduction if the Fair Market Value (FMV) of the contributed food inventory exceeds it basis.
- Contributions of Appreciated Stock – Deduct the contribution at FMV if greater than basis without triggering a taxable event.
7) State and Local Sales Tax – Don’t forget that in lieu of claiming the state and local income taxes withheld from your W-2 and/or estimated payments, you can opt to deduct state and local sales tax. You can either use actual numbers, or the optional tax table based on income, filing status as well as state and local sales tax rates. This can be beneficial if you’ve made big purchases, like building a home, cars, boats, are retired, or in a state with low taxes (such as Florida, Texas, Washington, Nevada, or New Jersey (when working in Philadelphia).
8) Expiring Provisions – it is always difficult to talk in the hypothetical terms, especially the change in the white house and congress. I prefer to talk about what I do know, and that is what is going away that may not be extending in the future. It is best to take advantage of it one last time and plan for ways to not need it in the future.
- a) Qualifying Principle Residence Indebtedness – if you foreclose on your house before the end of the year the first $2 Million of indebtedness is excluded. After this year, you’ll have qualify under another exemption, such as Bankruptcy or Insolvency, if you want to exclude the debt as income.
- b) Mortgage Insurance Premiums – perhaps you can refinance out of it or pay some money down on the loan so that your loan to value is 80% so you don’t have to pay this anymore. Speak with your mortgage carrier or a loan officer to see what options you have.
- C) Credit for Non-business Energy Property – qualifying expenses such as exterior windows, exterior doors, insulation, Main Air Conditioner, Furnace or Hot Water Heater are qualifying expenses subject to the Energy Star Qualifications (P.S if you have already used up your lifetime $500 credit, then this credit is no longer allowable). Check out www.energystar.gov, under “Tax Credits” for further details.
Thank you for your continued support and friendship! I look forward to seeing you all soon.