Year End Tax List

Another year is coming to an end and looming in the foreground is the yearly battle with the taxman. Some steps can be taken to help take out the bite this year and others can be taken to reduce your tax impact in the future. We have put together a list of current tips that can still be done and hopefully will prove to be useful to you.

Increase contributions to retirement plans.Some employees may be able to reduce Adjusted Gross Income (AGI) by increasing contributions up to retirement plans such as their 401(k) plan. In 2016, you can make deductible contributions of up to $18,000 or $24,000 if you’re over 50 to a qualified plan.

Make energy saving improvements to your primary residence. For CA residents, there are substantial tax credits for energy efficient home improvements such as solar electric panels or solar hot water heaters in 2016 that can save you a lot of money. These tax breaks are set to expire this year.

Realize losses on stock in any non-retirement accounts. Selling stocks at a loss can offset capital gains and income taxes. It may be advisable for us to meet to discuss any year-end trades you should consider making. Capital losses can be carried forward to offset future gains and up to $3,000 of losses can be deducted in the current year.

Take a required minimum distribution (RMD) from your IRA or 401(k) plan if you are age 70½ or older. Failure to take a required withdrawal can result in a penalty of 50 percent of the required amount not withdrawn. Individuals age 70½ or older generally must take the required distribution amount out of their retirement account before the end of 2016 to avoid the penalty. If you turned age 70½ in 2016, you can delay the required distribution to the first quarter of 2017, but if you do, you will have to take a double distribution in 2017 – the amount required for 2016 plus the amount required for 2017, so think twice before delaying 2016 distributions to 2017. Bunching income in 2017 might push you into a higher income tax bracket, or have a detrimental impact on various income tax deductions that are phased out at higher income levels.

Open a Spousal IRA and make a deductible contribution of up to $5,500 for 2016 and up to $6,500 if you are age 50 or older. Even a non-working spouse can make deductible contributions to an IRA using a spousal IRA. Phase out and eligibility rules are subject to limitations on your adjusted gross income, so double-check to make sure you’re eligible.

Or make a non-deductible Roth IRA contribution of up to $5,500 for 2015 and up to $6,500 if you are age 50 or older. Contributions to a traditional IRA reduce the amount you may contribute to a Roth IRA. Phase out and eligibility rules are subject to limitations on your adjusted gross income, so double-check to make sure you’re eligible.

Opt into using or increase the amount you set aside for next year in your company’s flexible spending account; don’t forget that these funds are generally use it or lose it.

For people with children under age 18, and especially under age 14 consider contributing to a qualified tuition plan (Section 529 plan) Unlike a Coverdell Educated Savings Account (CESA) there are no AGI limits on contributions to 529 plans. However, distributions of earnings from a 529 plan are tax-free only if used to pay for higher education expenses (college and above). 529 beneficiaries can be changed if funds remain in the plan and the original beneficiary no longer has any need.

Make annual exclusion gifts before year-end to save gift tax and estate tax. You can gift $14,000 per person ($28,000 as husband and wife) in 2016 to an unlimited number of individuals free of gift tax. However, you cannot carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2016, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.

We’d be happy to sit down with you and discuss some tax-reduction strategies you can take before the New Year. Because we work with many executives, managers, employees and retirees, we are very knowledgeable about various compensation plans and benefit offerings (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of our clients and you can ask them how working with an advisor has helped them.

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Year End Tax List