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Year-End Tax Planning – Don’t Wait Until the Last Minute

Now is the time to think about year-end tax planning strategies. While no significant change in tax rates is expected for 2016, there are still year-shifting maneuvers that could be employed if you expect to be in either a higher or lower tax bracket for 2016.

For instance, if you anticipate being in a lower tax bracket next year, you should consider delaying sale of assets producing gains, deferring any year-end bonuses and pushing out collection of outstanding accounts receivable. At the same time you should look at accelerating deductions into the current year by prepaying property taxes or January’s mortgage. You might also try to bunch medical and dental expenses into the current year if you expect them to exceed the adjusted gross income floor limitation for both years. Moving future charitable contributions into the current year as well as converting stock losses by selling before year-end should be considered.

On the other hand, if you expect to be in a higher bracket in 2016, the above strategies should be employed in reverse. Accelerate those income items over which you have control into the current year while pushing out deductible expenses until next year.

Again this year, one must keep an eye on the impact of the net investment income tax, which applies if the taxpayer’s modified adjusted gross income (MAGI) exceeds threshold amounts. Those threshold amounts are $250,000 for married filing jointly (and surviving spouses), $125,000 for married filing separately, and $200,000 for all others. The tax is 3.8% on the lesser of net investment income or the amount by which your MAGI exceeds the threshold amounts. To mitigate the impact of this tax one might consider moving income producing investments into tax-exempt bonds, thus lowering MAGI. Since the investment income tax applies to income from passive activities, you should explore whether any steps could be taken to reclassify such income as non-passive.

And, as always, you should make the maximum contributions allowable to retirement plans, especially if your employer makes a matching contribution.

 






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