As in the past, year-end tax planning for calendar year 2016 presents a challenge. The political and economic landscape is rocky and a number of tax provisions face expiration at the end of the year if not extended by Congress. The expiring provisions may be extended, as Congress has been prone to do, but that may not occur until late this year or early next year.
Taxpayers with higher incomes ($250,000 for joint filers or surviving spouses, different thresholds for others) must be aware of a 3.8% surtax on some types of unearned income. They may also face an additional 0.9% Medicare hospital insurance tax. Typically, those taxpayers should consider income deferral and/or reduction in net investment income and/or modified adjusted gross income.
The additional Medicare tax applies to joint filers at $250,000, $125,000 for married couples filing separately, and $200,000 for all other filers. At $200,000 an employer must withhold the additional tax regardless of other income or filing status. Taxpayers with dual employment near that level must be aware of the possibility of their need to file estimated tax if the employer automatic withholding is not triggered. And if, for some reason, a married couple does not reach the $250,000 threshold (having income between $200k and $250k) they may be over withheld.
Here are some points to consider by individuals in year-end tax planning:
- Take stock losses and buy back the securities after 31 days has passed.
- As usual, defer income (including any bonus) into 2017 and accelerate deductions into 2016.
- Convert a traditional IRA to a Roth IRA.
- “Recharacterize” a traditional IRA conversion by “backing out” of it, if the Roth assets have declined in value, and “redoing” the conversion at a later date. (Be sure to do this by trustee to trustee transfer.)
- Pay deductible expenses by credit card in 2016 and pay the invoice for them in 2017.
- Increase state withholding and/or estimated state tax payments for 2016.
- Review the impact of the Alternative Minimum Tax on taxes due. Deductions allowed in calculating regular taxes may not be available or may be curtailed for purposes of the AMT.
- Make a point of taking deductions in certain categories that may have thresholds, such as medical expenses, and which are itemized on a tax return. The “floor” for deduction of medical expenses is due to rise next year from 7.5% to 10%.
- Settle a pending casualty claim to take a casualty loss in 2016.
- If you are starting to take required minimum distributions, consider beginning them sooner rather than waiting until the time you are required to take them without penalty in order to avoid a “doubling up” of the first payment in the required payment year.
- Increase a contribution to a Health Savings Account or make a full year’s contribution if eligible to do so before December, 2016.
- Take advantage of the energy property credit available to home owners before it is due to expire in 2017.
- Make gifts to individuals subject to the per person $14,000 annual exclusion for each gift to each of an unlimited number of persons.
- Review estate planning to take advantage of present estate planning laws which may come under fire as a result of the upcoming election cycle.
And here are some points for businesses and business Owners to consider:
- Purchase items that may be “expensed” under Code Sec. 179. The “expensing limit” is $500,000, subject to an “investment ceiling” of $2,010,000 over which the expensing limit is reduced dollar for dollar. (The latter amount having been indexed for inflation in 2016.) The expense need not be prorated for the year.
- Take advantage of “bonus depreciation”, which, likewise, need not be prorated for the time in service during the year.
- As with individuals, businesses should consider whether it best to accelerate deductions and/or defer income.
- Defer any debt cancellation (debt due the business) until 2017.
- Increase basis in a partnership or Subchapter S corporation so as to be able to deduct a larger loss from the entity in 2016.
And looking ahead to 2017 for those planning for a retirement or a pension contribution:
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2017:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $62,000 to $72,000, up from $61,000 to $71,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $99,000 to $119,000, up from $98,000 to $118,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000, up from $184,000 and $194,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The income phase-out range for taxpayers making contributions to a Roth IRA is $118,000 to $133,000 for singles and heads of household, up from $117,000 to $132,000. For married couples filing jointly, the income phase-out range is $186,000 to $196,000, up from $184,000 to $194,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The income limit for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers is $62,000 for married couples filing jointly, up from $61,500; $46,500 for heads of household, up from $46,125; and $31,000 for singles and married individuals filing separately, up from $30,750.
Some limitations that remain unchanged from 2016:
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
- The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.