2016 Year-End Tax Planning

December 05, 2016 | News

Following the November election, the next few years present the possibility of significant changes to income tax and gift and estate taxes.  These changes hold the promise of simplifying the tax code and possibly repealing some taxes altogether like the gift and estate taxes.  At the same time, some tax reform proposals indicate a possible new emphasis on capital gains taxes in the future, which will require new planning strategies for taxpayers.  While there is much uncertainty about what shape tax reform may take, taxpayers can use several year-end planning strategies to maximize their tax benefits for 2016.

Accelerate Deductions

It is likely that top marginal income tax rates will be lower in the future, rendering income tax deductions less valuable.  Additionally, some income tax deductions could be limited or even eliminated in the coming years.  Thus, many taxpayers should pay deductible expenses in 2016 instead of 2017, if feasible.  Taxpayers should consult with their CPA as soon as possible and consider taking steps to accelerate deductions before December 31.

Charitable Planning and Donating Appreciated Assets 

Charitably inclined taxpayers may want to fund charitable trusts, private foundations, or donor advised funds or make charitable donations before the end of 2016.  Making charitable gifts before the end of the year will allow taxpayers to claim a charitable income tax deduction for 2016 that may be less valuable in 2017 and future years depending on changes in the tax laws.  Taxpayers may want to specifically consider donating appreciated assets to charity in 2016 to gain the additional benefit of avoiding capital gains.  The President-elect’s tax reform proposals have called for the end of this particular tax benefit, and the ability to avoid capital gains on such a charitable donation may be unavailable in the future.

IRA Charitable Rollover

Taxpayers who are age 70 ½ or older can choose to transfer up to $100,000 directly from an IRA to a charity.  This transfer avoids recognizing income on the transferred amount, but does not generate a charitable deduction.  Such a transfer counts towards the required minimum distribution from the IRA.  This charitable rollover can be an important tool to minimize adjusted gross income, which is a measure for various other tax items like itemized deductions and the 3.8% Medicare surtax.

Maximize 401(k) Contributions

Taxpayers should maximize contributions to employer-provided retirement accounts.  These contributions provide tax benefits as well as prudent planning and saving for retirement.  The 2016 maximum contribution is $18,000, and the catchup contribution amount is $6,000.

Plan for the Medicare Surtax

The Medicare surtax of 3.8% applies to the net investment income of taxpayers who have adjusted gross income over certain thresholds ($200,000 for a single filer; $250,000 for married filers).  Planning that will harvest losses and reduce adjusted gross income by year end can minimize exposure to the Medicare surtax. Taxpayers who have high adjusted gross income and substantial passive investment income should work with their CPA and other tax advisors to determine if they can minimize the effect of the Medicare surtax before December 31.