Last Chance Tax Tips for 2016
So you have a few more days in 2016 and would like to know how to minimize income taxes for the year. This is a last chance emergency plan to rescue you from additional federal taxes, if possible, for 2016.
First, note that some suggestions could be too late for the year so the focus is on those you might still be able to take. By the way, a handy summary was also provided on line by Waddell & Reed, a financial consulting firm, titled “Ten Year-End Tax Tips for 2016,”. I will use this as a guideline but will be adding my own suggestions especially at the end.
First. Waddell & Reed recommends that you set aside time to plan. This ship has probably sailed. Do not worry. There are others.
Second. Defer income to next year. You might be expecting year end income from rental properties owned by you, from a bonus from your employer or payment for services. Especially if you expect your income for next year might be lower, you could opt to defer the income into next year.
Third. Accelerate deductions. This is the time to take a close look at deductions if you itemize. You have even more opportunities if you are a small business owner to make deductions through business purchases. For individuals, you could make payments on state taxes for instance. For special consideration on medical expenses take a look at my comments at the end. Also, if you are a business owner, consider when you want to pay your deductible expenses such as office rent or phone and whether there are any purchases such as computers and other equipment that should best be made this year. Remember if you want to be sure this is counted this year and not into next to make payment by some form that will be documented as being this year, for instance by credit card or cashier’s check.
Fourth. Factor in Alternative Minimum Tax. I have not had experience with many taxpayers who are subject to AMT but, if so, prior advice regarding deferral of income or deduction of expenses might have a negative effect. If you are not sure, check with an accountant or other trustworthy source.
Fifth. Increase Withholding. Increasing withholding does not necessarily reduce taxes but does prepare for April 15 (April 18, 2017 for 2016 taxes). You can also keep in mind that the January 15 estimated tax date is approaching and make payment accordingly if you pay estimated taxes.
Sixth. Maximize Retirement Savings. Probably almost every taxpayer knows by now that contributing to his or her IRA or 401(k) will reduce your taxable income. Still, a strategy to keep in mind.
Seventh. Take Any Required Distributions. This one is an avoidance of penalty issue. After reaching age 70 ½ you must begin taking Required Minimum Distributions from IRA’s, 401(k)’s or employer sponsored retirement plans (with the possible exception if you are still working for the employer and participating). The hammer is a whopping 50% penalty of funds that failed to be taken, in effect giving the government half of your untaken distribution. The reason for this is to prevent people from storing away their retirement funds forever without the government being able to recapture some of the taxes that were deferred. RMD’s cannot be rolled over and must be taken.
Eighth. Consider investment moves. The idea here is to offset gains versus losses.
Ninth. High net worth individuals should consider the net investment income tax. This applies mostly to investors. Get advice if you think it applies.
Tenth. Get help if needed.
Eleventh. This is special for those who either themselves or their spouses have incurred extreme medical expense this year – a group of people who I typically work with. If you or your spouse is in personal care (assisted living) or nursing home care, the chances are that the cost of your room, board, medications and all related expenses in addition to your health insurance premiums, long term care insurance premiums, co-pays and deductibles and other medically related expenses if they are over 10% of adjusted gross income (over 7 ½% of adjusted gross income if you are age 65 or over) are deductible at 100% over this threshold amount. If you had to cash in retirement funds or investments that have tax effect, this deduction can be extremely worthwhile to offset any increase in taxes.
Have a great New Year!
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.