The pending transfer of power in Washington raises a lot of questions about future tax planning, given that the incoming president is a Republican and that his party will control the House and Senate.
President-elect Donald Trump wants to cut taxes and replace today’s seven tax brackets with just three: 12 percent, 25 percent and 33 percent. He also has proposed eliminating exemptions and most itemized deductions, except those for child care, mortgage interest and charitable contributions.
But for now, we have to go with the tax rules currently in place. We do know that many of the so-called “tax extenders” that were passed in December 2015 remain in effect through 2016; a few provisions affecting individual taxpayers expire at the end of the year.
Following are 10 year-end tax moves to make before New Year’s Day.
The top tax rate currently is 39.6 percent on taxable income of more than $415,050 for single taxpayers; $466,950 for married couples filing joint returns ($233,475 if filing separately); and $441,000 for head-of-household taxpayers. If your remaining pay will push you into the top tax bracket, defer receipt of money where you can.
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you’re self-employed, don’t send out invoices for year-end jobs until early 2016.
This strategy works even if you’re not in the top tax bracket, but just about to cross into the next higher one.
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Even if you’re nowhere near the top tax bracket, putting as much money as you can into your company’s 401(k) or similar workplace retirement savings plan is a good idea. Since most plan contributions are made before taxes are taken out, you’ll have a bit less income that the IRS can touch. (Exceptions are contributions to Roth 401(k) plans, where you put away after-tax money and get tax-free growth.) Plus, the sooner you put the money into the account, the longer the earnings will grow tax-deferred.
Few of us will reach the maximum $18,000 that employees can stash in a 401(k) this year and next year, but any amount you can contribute is good. If you are age 50 or older, you can put in an extra $6,000.
In most cases, you can modify your 401(k) contributions at any time, but double-check with your benefits office to be sure of your plan’s rules.
Another workplace benefit, the medical flexible spending account, or FSA, also requires year-end attention so you don’t waste it. You can contribute up to $2,550 to an FSA via paycheck withdrawals.
As with 401(k) plans, money goes into an FSA before your taxes are calculated, saving you some tax dollars. But if you leave any money in your FSA, you could lose it. Some companies allow a two and a half-month grace period into the next year to use the untouched FSA funds, but not all. And though last year the U.S. Treasury announced a change in the use-it-or-lose-it rule, allowing account holders to carry over up to $500 in excess money into the next benefit year, your company has to offer this option.
Be sure to check with your employer, and if you must use your FSA money by Dec. 31, make sure you do. Buy those contact lenses, stock up on medical supplies, see the dentist about that crown or get your hearing checked.
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If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. If you have more than $3,000 in losses, they can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax. This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes, or AGIs, of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this tax burden — as long as it remains in effect — by using capital losses to reduce their taxable amount.
If you do face the 3.8 percent surtax, consult with your financial adviser and tax professional. In addition to figuring your modified AGI, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.
Homeownership provides a variety of tax breaks. One of the biggest is mortgage interest, which can be deducted if you itemize. So if you make your January mortgage payment by Dec. 31, you can deduct the interest from that payment on your coming tax return. The same is true for early property tax payments.
For the 2016 tax year, mortgage insurance premiums can be deducted. This law expires at the end of December unless Congress extends it. Likewise, homeowners who receive mortgage loan forgiveness can be exempt from tax, thanks to a provision that expires at the end of 2016. Normally, when such debt is forgiven via short sale or foreclosure, the amount of the discharge is added to your gross income and taxed.
But you do get a little relief from that deadline as long as you enter into an agreement before the end of the year to get your mortgage debt discharged. In that event, the exclusion applies in 2017, even if Congress doesn’t extend the law.
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Taxpayers who itemize know there are many ways on Schedule A to reduce AGI to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.
Medical and dental expenses, for example, cannot be deducted unless they exceed 10 percent of AGI. The 7.5 percent AGI threshold still applies to taxpayers age 65 or older through December 2016. Miscellaneous expenses, which include business expense claims, must be more than 2 percent of AGI for filers of all ages.
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. Since some deductions may disappear in the future, it may be best to try to bunch them in 2016.
Remember that added money you put in your 401(k) to lower your taxable income? Bulk up your retirement planning even more by contributing to an individual retirement account.
If you have an IRA account or open a traditional IRA, you might be able to deduct at least some of your contributions on your tax return. If you don’t make a lot of money, your contribution also could be used to claim the retirement savings contributions credit.
Even if you won’t get a deduction, you’ll be adding to your nest egg so that you can retire on your terms. And while it’s true you can wait until the April filing deadline to contribute for the previous tax year, the sooner you put money into an IRA, traditional or Roth, the sooner it can start earning more for your golden years.
Self-employed workers also get an added retirement saving benefit. There are a variety of plans — SEP IRAs, solo 401(k) plans and others — into which you can put some of your self-employment earnings. If you’re a sole proprietor, your contribution to a self-employed retirement plan also is deductible on your tax return.
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As you’re putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles, with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset’s value at the time of gifting. Even better, you don’t have to worry about capital gains taxes on the appreciation of your gift.
The spring semester’s bill isn’t due until January, but it might be worthwhile to pay it before year’s end. By doing so, you can claim the American Opportunity Tax Credit or the Lifetime Learning credit on this year’s tax return.
An alternative tax break is the tuition and fees deduction, an above-the line deduction that expires on Dec. 31 unless Congress extends it. Generally, tax credits are more valuable than deductions, but because the rules and phase-outs for these various education tax breaks are different, you need to get acquainted with them to see which one works best for you.
In any case, paying tuition before the end of this year for the spring semester makes good tax sense.
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While there’s talk about dismantling Obamacare and replacing it with something better, for now, taxpayers who can afford health insurance but who don’t have adequate coverage must pay a fine, which can run into several hundred dollars or more, depending on the size of your family.
You’ll owe the fee for any month you, your spouse or your tax dependents don’t have qualifying health coverage, and it’s payable when you file your return. If this situation applies to you, check into coverage now to avoid this pain next year. You have until Jan. 31 to enroll in or change your 2017 health plan. Medical coverage provided by your employer or through an individual plan purchased through a state insurance marketplace generally qualifies as adequate coverage.