By James Motte
As 2016 draws to a close, there is still time to reduce your 2016 tax bill and plan ahead for 2017. The following highlights several opportunities for you to consider.
DEFERRING INCOME TO 2017
If you expect your AGI to be higher in 2016 than in 2017, or if you anticipate being in the same or a higher tax bracket in 2016, you may benefit by deferring income to 2017. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket.
ACCELERATING INCOME INTO 2016
In limited circumstances, you may benefit by accelerating income into 2016. For example, you may anticipate being in a higher tax bracket in 2017, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years.
RMD
Remember to take your Required Minimum Distributions: For 2016, taxpayers who are at least 701/2 must take their required minimum distribution from IRAs or defined contribution plans. The distribution must be taken by December 31, 2016. However, if you turn 70 1/2 during 2016, the first distribution is not required until April 1, 2017. Failure to withdraw your Required Minimum Distribution will result in a 50% penalty.
A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual who has reached age 701/2. These distributions count toward your annual Required Minimum Distribution amount.
ANNUAL GIFT TAX EXCLUSION
Individual’s that want to give money to friends and family should be aware of the Annual Gift Tax Exclusion. This exclusion allows for tax-free giving, which, for 2016, allows a person to give up to $14,000 to each donee without reducing the giver’s estate and lifetime gift tax exclusion amount.
IRA CONTRIBUTIONS
Traditional IRA: Individuals may be allowed to make deductible contributions to an IRA depending on their eligibility to an employer retirement plan and income limitations. The annual deductible contribution limit for an IRA for 2016 is $5,500. For 2016, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year.
Roth IRA: This type of IRA permits nondeductible contributions of up to $5,500 for 2016, but no more than an individual’s compensation. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 591/2 . Contributions to a Roth IRA are phased out and certain income limits.
Roth IRA Conversion Rule: Funds in a traditional IRA (and other retirement plans) may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.
CHARITABLE CONTRIBUTIONS
Consider making your charitable contributions at the end of the year. This will give the charity use of the money during the year and simultaneously permit you to claim a deduction for that year (assuming you itemize). To avoid capital gains, you may want to consider giving appreciated property to charity.
HEALTH SAVINGS ACCOUNTS
If your family is covered by “high deductible health plan” you may want to consider maxing out contributions to your Health Savings Accounts. Contributions to an HSA are deductible (within limits) and contributions can be withdrawn tax-free when paying for qualified medical expenses.