2016 Year End Tax Planning

To Our Clients and Friends: As we get closer to the end of yet another year, it’s time to tie up the loose ends and implement tax saving strategies. With the fate of many of the long-favored tax breaks (so-called extenders) having been settled late last year, this year’s planning should be easier –at least more certain tax-wise- than it has been in quite a while. We’ve listed below a few money-saving ideas that you may want to put in action before the end of 2016:

• Between now and year-end, review your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year.
• If your itemized deductions are just at or below the standard deduction (currently $12,600 for joint filers, $6,300 for singles, and $9,300 for heads of households), consider bunching itemized deductions, such as charitable contributions, property taxes, and the fourth quarter estimated state income tax payment into a single tax year and taking the standard deduction the following year. However, watch out for Alternative Minimum Tax (AMT), as these taxes aren’t deductible for AMT purposes.
• If you have reached age 70 ½ , make sure you take your required minimum distribution to avoid penalties. Also, consider making charitable contributions directly from your IRA. These so-called Qualified Charitable Distributions (QCDs) are federal-income-tax-free to you, which equates to a 100% write off (up to $100,000 per individual IRA owner per year), without having to itemize deductions. Be careful though. To qualify for this tax break, the funds must go directly from your IRA to the charity.
• If your employer offers a flexible spending account arrangement for your out-of-pocket medical or child care expenses, or a health savings account for medical expenses, make sure you’re maximizing the tax benefits during the upcoming enrollment period for 2017.
• If it looks like you are going to owe federal income taxes for 2016, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year.
• If you are self-employed, consider employing your child. Doing so shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings and the ability to contribute to an IRA for the child. But be careful for college-age kids, too much earned income can detrimentally impact financial aid.
• If you own an interest in a partnership or S corporation that you expect to generate a loss this year, you may want to make a capital contribution (or in the case of a S corporation, loan it additional funds) before year end to ensure you have sufficient basis to claim a full deduction.
• Watch out for the Alternative Minimum Tax (AMT) in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem.
• Don’t overlook Estate Planning. For 2016, the unified federal gift and estate tax exemption is a generous $5.45 million, and the federal estate tax rate is a historically (if not financially) reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes that have nothing to do with taxes. Contact us if you need an estate planning tune-up.
• Last but not least, there are several Changing Due Dates for Corporate and Partnership Returns that will impact the 2017 filing season:
  • Form 1065 (Return of Partnership Income) and Related Schedule K-1’s. The 2016 Form 1065for calendar-year partnerships (which are the vast majority) will be due on March 15, 2017. In previous years, these returns were due on April 15 of the year following the close of the partnership’s tax year.
  • Form 1120 (Corporate Income Tax Return). The 2016 Form 1120 for calendar-year corporations will be due on April 18,2017. In previous years, these returns were due on March 15 of the year following the close of the corporation’s tax year.
  • Note - The due date for Form 1040 (Individual Tax Return) and estimated payments is unchanged. The due date for Form 1120S (Income Tax Return for an S Corporation) and 1041 (Fiduciary Income Tax Returns) is also unchanged.

Again, these are just a few suggestions to get you thinking. If you’d like to know more about them or want to discuss other ideas, please feel free to contact your PBLM accountant.