As we approach the end of 2016, there is still time to make some effective tax-planning decisions that can reduce your tax bill for the year. Here are some ideas to consider in the next few weeks.
It may be better from a tax standpoint to donate appreciated capital gain property (stock) to your favorite charity instead of writing a check. If you are over 70 ½, and therefore required to take a required minimum distribution from your traditional IRA, you have the option of making a QRD – qualified charitable distribution – and having part of your distribution contributed to a charitable organization. This can be helpful if you are trying to reduce your adjusted gross income for any reason.
If you are employed, consider having additional amounts deferred from your paycheck towards the end of the year in order to fully maximize your allowable 401k contribution ($18,000, in most cases, and an additional $6,000, if you are age 50 or older).
Check your portfolio, or consult your investment advisor, to evaluate your holdings for capital gains realized in 2016. Consider selling other investments to generate losses to offset your capital gains dollar-for-dollar. Remember unused capital losses can be carried forward to offset gains in subsequent years.
If you purchase and place in service a piece of equipment for your business, you can deduct the full purchase price, up to $500,000, rather than capitalizing and deducting the cost over a period of years, as long as the cost does not create or increase a net overall loss for your business.
High-net-worth taxpayers may want to consider gifting up to $14,000 to multiple family members or other individuals before year-end to reduce their taxable estate. Married couples may gift up to $28,000 to each individual if they elect gift-splitting.
Ensure that you are safe from underpayment of estimated tax penalties. Alternately, you may be able to increase your withholding, if needed, to make up any shortfall.
In addition to the year-end planning ideas, it’s also important to keep in mind the growing identity theft problem that seems to be affecting more and more taxpayers. Remember, the IRS will generally never contact you via email or phone. Any unsolicited correspondence from taxing authorities should be considered suspect. Always check with your tax advisor before responding to any communication from the IRS or the state tax departments.
Keep in mind as we approach the end of 2016 that scrutiny regarding compliance issues with foreign account reporting continues. Taxpayers with foreign accounts (or signature authority over those accounts) are subject to strict reporting requirements. Consequences of not complying with the disclosure requirements can be steep and are being strictly enforced. Again, a call to your tax advisor now can eliminate headaches down the road.
Planning ahead is a great strategy to help you minimize your tax bill, as well as position yourself for greater financial success in the future.
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