With 2016 about to close and Dec. 31st just around the corner, it’s time to start thinking about next tax season – and to make any last-minute moves that might improve a client’s tax position. With that in mind, here’s a list of tax tips for you and your clients to think about before the end of 2016.
1. First – what’s not changing: While President-elect Trump is in a strong position to enact his promise of lower tax brackets next year, it’s important to remember that the current income tax rates of 10, 15, 25, 33, 35 and 39.6 percent are still in effect for the tax returns being filed by next April 17th. The standard deduction amounts remain $6,300 single/married filing separately, and $12,600 for married filing jointly. The standard deduction for heads of households, however, rises to $9,300.
2. Maybe Deferring income: If the president-elect does manage to lower and simplify the individual tax brackets per his plan, that means rates next year will be lower, so 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, or putting off debt forgiveness income.
3. Keep An Eye On AGI: Since some tax benefits, including itemized deductions, personal exemptions, and education & adoption credits, get phased out depending on a taxpayer’s adjusted gross income, deferring income may also make sense depending on their current AGI.
4. New Permanent Incentives For Individuals: The PATH Act of 2015 made a number of tax incentives permanent.
A. For individuals, these include:
- • The American Opportunity Tax Credit;
- • The teachers’ $250 classroom expense deduction;
- • The ability to deduct state and local sales tax instead of state income taxes;
- • The exclusion for direct charitable donation of up to $100,000 from an IRA; and,
- • The 100 percent gain exclusion on qualified small-business stock.
B. For businesses, these include:
- • The reduced five year recognition period for S Corp built-in gains tax;
- • 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements; and,
- • Charitable deductions for the contribution of food inventory.
5. Max Out Retirement Accounts: If a taxpayer’s employer offers matching, then maxing out contributions to a 401(k) is as close to a no-brainer as you can get – but even without matching, sequestering income in 401(ks), and IRAs is still a great deal.
6. Tax-Loss Harvesting: Even in the current bull market, a portfolio can contain some duds – but they can still be useful! Taxpayers with large amounts of taxable gains in 2016 may want to offset some of those by realizing losses on those duds to lower their overall capital gains exposure.
7. Be Careful With Mutual Funds: Many mutual funds make capital gains distributions in December, so taxpayers will want to bear that in mind when buying or selling. That a fund is or isn’t planning a major distribution needn’t necessarily be a deal-breaker – but it may add to the eventual tax bill.
8. Careful To Update Address: If you have moved during 2016 you should make sure to notify your employer, banks, mortgage company and other third parties that send information returns; such as 1099 forms so you do not have a delay in January getting information.
9. Divorced or Married: If during 2016 you got married or divorced and that created a change of name make sure to notify the social security administration. Remember that the IRS and Social Security Administration do have an exchange of information and can lead to rejection upon filing your taxes.
10. Capital Purchases: For those business clients with an expected high profit: this would be a good time to look into purchasing large equipment that can be completely depreciated and thus reduce said profit and in thus reduce taxes paid.
Merry Christmas, and a Happy New Year!!