December has arrived. April 18, 2017 will be here before you know it. Yes, we get an extra three days to file our 2016 tax return.
While I know this is a busy time of year for most of us with holiday parties, family visits and traveling, it is important that you make time to plan for tax season while you still have a chance. After all who wants to pay the IRS more than they have to? Here are some tips which may help you reduce your tax bill.
Defer income to 2017 if you anticipate being in a lower tax bracket next year. If you will be in a higher bracket in 2017, then the goal is to accelerate income payments into 2016 when you are in a lower bracket.
If you are self-employed you can delay or accelerate income by properly timing your invoices so that payments arrive prior to, or after, the end of the year. If you are an employee, deferring wages is harder to do. However, if you will be receiving a bonus at the end of the year and your employer has a practice of paying year-end bonuses the following year then you may be able to defer the bonus.
Determine if you will be able to itemize deductions or not. If you are on the borderline between itemizing and claiming the standard deduction then your goal is to time deductions so that you cause a bunching of your deductions. This strategy will enable you to have one year with a lot of deductions which you can itemize, and a year with few deductions in which you cannot. You can create this bunching by accelerating deductions. For example, make year-end charitable contributions, make large purchases which will generate a sales tax in 2016 or pre-pay property tax bills if you can.
Alternative Minimum Tax
In figuring out your deduction strategy, keep in mind that certain deductions will trigger the alternative minimum tax. Therefore, do not accelerate deductions if doing so will result in the imposition of the alternative minimum tax.
Harvest your Losses
If you have realized capital gains during the year and are planning to sell investments determine whether any of these sales will generate losses. If so, sell off the investment in 2016 so that you can offset the capital gains with the capital losses. You can offset an additional $3,000 of losses with other income. Any additional losses can be carried over to subsequent years.
Maximize contributions to retirement plans
If you participate in your employer’s 401(k) plan contribute the maximum allowed. In 2016 the amount which may be contributed is $18,000; $24,000 if you are over 50. Additionally, even if you have an employer sponsored retirement plan you may be able to contribute $5,500 ($6,500 if you are over 50) to an IRA and, if you qualify, take a deduction for the contribution. The amount which can be deducted depends on your marital status and the amount of your adjusted gross income. Contributions to an IRA can be made until April 15, 2017.
There are several benefits to making contributions to a 401(k) plan. First, the contributions are not wages and will not be subject to income tax, although they will be subject to social security and medicare tax. Second, you will be taxed on the 401(k) only when you begin to receive distributions. Third, your employer will usually match a percentage of your contribution.
A self-employed individual can also contribute to a retirement plan, for example a Keogh or SEP, so long as the plan was established by December 31.
These are just some basic year-end tax planning suggestions. There may be many more depending on your particular circumstances. Due to the complexity of the tax laws it is in your best interest to speak to a tax professional.