Traditional Year-End Tax Considerations

November 7th, 2016

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules:  when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into the next year or beyond.

Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits.  Often tax savings can be realized by lowering income in one year at the expense of realzing a bit more in the other: in this case, either 2016 or 2017.  Some of those benefits that get phased out depending upon the taxpayer’s AGI level include:  itemized deductions, personal exemptions, education savings bond interest exclusion, maximum child’s income on parent’s return, medical savings account adjustments, education credits, student loan interest deduction, adoption credits, maximum ROTH IRA contributions, and maximum IRA contributions for individuals.

Income Acceleration/Deferral – Individual taxpayers can monitor their AGI by deferring or accelerating income.

  • Sell appreciated assets – If you have current losses, it may make sense to realize some gains. Doing so can reset your cost basis.  The “wash sale” rule only applies to losses.
  • Installment contracts – Income on a sale reported under the installment method is realized pro-rate over the years in which the installment payments are made. If you with to accelerate income the realization, you can do so by selling the reminder of the installment contract to a third party for a lump sum.
  • S. Savings Bonds – Interest on series E, EE and I bonds are generally taxed at the earliest of disposition, redemption or final maturity of the bond. However, you can elect to report the interest as it accrues.

Deduction acceleration/deferral.  A taxpayer generally deducts an expense in the year it is paid.  By prepaying some 2017 expenses, you may able to accelerate a deduction.

  • Pay January mortgage payment in December – by paying your January mortgage payment in December, you increase the amount of mortgage interest paid in 2016 and increase your itemized deductions
  • Prepay Tuition– by paying the spring semester tuition in December, you may qualify for additional education credits.
  • Pay 4th quarter estimated state taxes in December – While the 4th quarter estimated tax payments are not due until January 15, 2017, if you are not in AMT, paying the estimate in December vs. January can increase your itemized deductions

If you are age 70 ½ or older and charitably inclined, you may benefit by donating monies directly from your IRA to charity.  A qualified charitable distribution is a distribution from your IRA made directly by the trustee to a charitable organization.  By donating monies directly to charity, you not only fulfil your Required Minimum Distribution (RMD) while up to $100,000 per person also is excluded from your taxable income.  This provision reduces your AGI which might impact not only your overall tax rates but also if you will be subject to any additional Medicare premiums.

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