There are some proven tax planning tips that can be applied each and every year. They are highly effective and proven to minimize your tax bill. Here is a brief highlight of the tax planning maneuvers you should be considering for 2016:
1) Defer Income: Income is taxed in the year it is received. Consider deferring year-end bonuses from employers to 2017 if that income will place you in a higher tax bracket in 2016. If you are self-employed, you may consider delaying billings until late December so that the payments are not received until 2017. Also consider accelerating income into 2016 if you will be in a lower tax bracket in the current tax year.
2) Charitable Deductions: You may wish to consider donating appreciated property (stocks or property) in lieu of cash. You achieve the double tax benefit of deducting the contributed asset at Fair Market Value and avoiding paying the capital gains tax on the built-up appreciation.
3) HSA: Consider setting up and contributing to a Health Savings Account. You may make a tax deductible contribution to a Self-Only HSA of $3,350 or a family HSA of $6,750 (plus an additional $1,000 if age 55+). You must have a minimum annual deductible of $1,300 in an individual plan or $2,600 as a family plan.
4) Loss Harvesting: Offset capital gains on sales of stocks or mutual funds by selling investments that you are holding at an unrealized loss. Gains are offset dollar-for-dollar against losses and you may deduct $3,000 over and above any gains.
5) Maximize your retirement accounts:
6) Check your Flexible Spending Accounts: Take a fresh look into your planned medical expenses and update your FSA to maximize its benefit.
7) “Bunch” your itemized deductions: Each taxpayer has a choice of taking the Standard Deduction or the Itemized Deduction expense, whichever is higher. The Itemized Deduction expense includes items such as out-of-pocket medical, mortgage interest, real estate taxes, and charitable contributions just to name a few. You may not have enough expenses in order to take advantage of itemizing deductions each year. You may gain an advantage by “bunching” these expenses every other year which may allow you to exceed the Standard Deduction threshold. “Bunching” is the technique of accelerating your Itemized Deduction expenses into a tax year, in effect doubling those expenses. For example, you may prepay a known medical expense, pay your real estate taxes in December rather than February of the next year, pay a planned charitable donation early, or pay your state and local estimated taxes in December instead of January.
8) Use your RMD as a Charitable Deduction tool: Taxpayers 70 and older are allowed to use their Required Minimum Distributions (RMDs) from their IRAs as charitable contributions and not count the RMD as taxable income. The RMD must be directly transferred to the qualified charitable organization.
9) Gifting: Taxpayers, and their spouses, are allowed to gift $14,000 each to any number of individuals without having to pay gift tax on the money. One tax planning tip would be to consider gifting appreciated stock worth $14,000 to the individual(s) in lieu of cash if that individual is in a lower tax bracket. The taxpayer gifting the appreciated stock does not owe capital gains tax on the transaction, and the gifted stock transfers to the individual to compute their gain at the potential lower rates.
10) Medicare Surtax: Certain high-income taxpayers are subject to the Medicare Surtax of an additional 3.8% on their net investment income. The taxpayers may want to consider investment strategies such as tax-free municipal bonds that are not subject to the Medicare Surtax.
LFG will be hosting a complimentary educational program on these tax tips and more on Tuesday, November 15 at 1:00pm and Thursday, November 17 at 6:00pm. Give us a call to reserve your seat!