Year End Tax Planning for Individuals

November 3, 2016 by Aaron Bloom
Copeland Buhl

2016 is quickly coming to a close, but there is still ample time to plan and exert some control over your forthcoming tax bill! This article will breakdown some of the various planning techniques available to individuals.

State Income Tax Deduction – If you pay state estimated tax, paying your 4th quarter 2016 estimate before January 1st, 2017 could provide you a deduction on your 2016 federal taxes. For those who receive a W-2 each year, ask your employer to increase the withholding of state taxes for the remainder of the year. The one caveat is if you’re subject to the Alternative Minimum Tax (AMT) in 2016 – state tax deductions are explicitly disallowed for AMT purposes and will not provide you a benefit.

Retirement Accounts – Contributing to your IRA, SEP Plan, or any other retirement vehicle is a great way to grow your retirement fund and receive a current year tax deduction. Contribution limits and rules vary between plans, but if you’re short on cash do not fret about making the contribution before December 31st. Traditional IRA contributions must be made by April 17th, 2017 while October 16th, 2017 is the deadline for SEPs.

These later deadlines do not apply for those with a 401(k) plan through work. Contributions via payroll must be in by the time your last paycheck is processed for the year. Speak with your plan administrator at work to increase contributions before the end of the year.

Health Savings Account – High deductible health insurance plans (HDHP) are becoming increasingly popular. To go along with a HDHP, the Health Savings Account (HSA) is a medical savings account that is afforded generous tax advantages by the tax code. Money contributed reduces your adjusted gross income dollar-for-dollar and if distributions from the HSA are spent on qualifying medical expenses the distributions are tax free. Furthermore if contributions are made via payroll you can also avoid Social Security & Medicare taxes on the amount contributed. Contribution limits for 2016 are $3,350 for taxpayers with a self-only HDHP and $6,750 for taxpayers with a family HDHP. Taxpayers aged 55 and over may contribute an additional $1,000 to the amounts listed previously, but be aware that contributions are NOT allowed for the months an individual was enrolled in Medicare. Individual contributions must be made by April 17, 2017, while contributions by payroll must be made before your final paycheck of the year is processed.

Consider treating your HSA as a retirement vehicle. HSA distributions for nonqualified medical expenses are subject to a stiff 20% penalty unless you are 65 or older or permanently disabled (they are still subject to income tax much like a traditional IRA). Some HSA plans offer the ability to invest in many of the same funds that your 401(k) or IRA offer. Coupled with the fact that HSA contributions are not subject to income limitations, this provides an additional way to save for retirement even if you do not use the funds on medical expenses.

Capital Losses – If you’ve incurred significant capital gains in 2016 and have been debating ditching a few losers in your portfolio, consider doing so before the end of the year to protect yourself from capital gains tax. Taxpayers are allowed to offset their capital gains with their capital losses. Net capital losses are limited to $3,000 per year for most taxpayers and the remainder is carried forward indefinitely until it is fully absorbed.

If you plan on selling securities to trigger a loss and wish to repurchase those stocks at a later date, be sure to wait at least 31 days after the sale date to prevent wash sales.

Medical Expenses – Qualified medical expenses have a high threshold for deductibility (10% of your AGI or 7.5% if you are over the age of 65). If you believe you will surpass the threshold consider scheduling medical procedures, purchasing eyewear or hearing aids, and refilling prescriptions before the end of the year. If you believe your income will be much lower in 2017 or you’ll have significant medical expenses next year then consider postponing medical expenses until January.

Charitable Donations – If you’ve been cleaning out your home and no longer have the need for some of your household goods or clothing, consider donating them before the end of the year to claim a deduction. If you’re planning on making a large cash donation, check your portfolio to see if you have any appreciated stocks. Donating stock instead of cash allows you to avoid paying capital gains tax on the sale and you can deduct the fair market value of stock (stock must have been held for at least a year otherwise your donation is limited to your cost basis in the stock). For those aged 70 ½ and over, consider making charitable contributions directly from your IRA.

Remember, if your contribution is by check, the date the check is mailed will determine what year you get the deduction. If your contribution is by credit card the date your account incurs the charge will determine the year of deduction so be sure to give the charity ample time to process your credit card. Be sure to protect yourself against audit and always request a receipt of your donations for your records.

Energy Credits – If you’ve contemplated making energy efficient improvements to your home, consider doing so before the end of the year. There is a 30% credit on qualified solar, small wind, geothermal heat pump, and fuel cell property costs with no upper limit on the amount of the credit. For smaller improvements such as new windows and new energy efficient water heaters there is a 10% credit with a lifetime limit of $500.

It is important to note that every taxpayer’s situation is different and some of these techniques may not be beneficial in your particular situation. Please contact our office to discuss what planning techniques are appropriate for you.