Another year is quickly coming to a close and it’s time to address planning opportunities aimed towards reducing your 2016 income tax liability. Therefore, while you are decking the halls and preparing the eggnog we recommend that all of our clients invest a few hours before year-end to project their 2016 taxable income and reflect on the tax planning ideas listed below. Acting on these planning opportunities before year-end may save you thousands of dollars. This is also a good time to start organizing your tax records so that we can begin the preparation of your 2016 income tax returns early in 2017.
The general rules of tax planning are as follows:
- Defer income to the next year and accelerate deductions into the current year (i.e. defer net taxable income);
- Due to the election of President elect Donald Trump, who has promised to lower tax rates and enact tax reform in his first 100 days in office, the deferral of net taxable income may be more important for this 2016 tax year than ever before (see a brief summary of Mr. Trump’s plans below);
- With that said, only death and taxes are certain and it is almost impossible to know exactly what changes will be enacted and how they will affect taxpayers at all levels of income (i.e. taxes could go up in 2017 even with tax reform for some taxpayers);
- Under normal circumstances (e.g. if you expect to be in a higher tax bracket next year, or expect to be subject to the alternative minimum tax (AMT) this year and not next year) it sometimes makes sense to defer deductions and accelerate income, however,
- Below we are focusing exclusively on a few brief net taxable income deferral techniques.
It is generally helpful to use your 2015 income tax return to project your taxable income for 2016 by adjusting the 2015 items for expected changes in 2016. The following are some specific example of how to defer net taxable income:
- Businesses generally have some leeway in the timing of billings/collections and the payment of expenses between 2016 and 2017; accordingly, there is some flexibility in managing 2016 business income;
- Accelerate the purchase of office equipment and other business property to take full advantage of the section 179 and bonus depreciation write-offs;
- If you are an employee due a year-end bonus, consider asking your employer to pay the bonus in January 2017;
- Harvest losses from your investment portfolio;
- If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable;
- Retirement plan contributions can be maximized (in many cases you will have until next year to make this decision);
- Secure a loss deduction for a nearly worthless security (not otherwise deductible unless you can prove that it is completely worthless), by selling it (even if only for a very nominal amount);
- Accelerate year-end:
- Charitable contributions (you may consider a donor advised fund, available from a number of mutual fund companies, if you would like to control the investment of the funds and have them distributed to the charity of your choice at a later date);
- State income tax installments and/or balances;
- Property tax payments; and
- Medical and dental expense payments.
There was little tax legislation in this 2016 tax year, however, the following recently enacted changes are worth noting:
Notable Recent Changes
- Partnership Return Due Dates – for this 2016 tax season, the due date for partnerships returns has been moved up to coincide with the due date of S corporation returns. It is now the 15th days of the third month after the close of the partnership tax year (generally March 15th).
- C Corporation Return Due Date – also for this 2016 tax season, the due date for C corporation returns has been moved back to the 15th days of the fourth month after the close of the corporation tax year (generally April 15th). However, there is an exception for C corporations with a June 30 fiscal year. The due date for filing a June 30 C corporation return remains the 15th day of the third month following the end of the year (i.e., September 15th) for the next 10 years.
- Extended Due Dates – the extended due dates for both Partnerships and C Corporations will remain the same at September 15th for businesses with a calendar year-end.
- The Research and Development Credit and the $500,000 limit for Section 179 deductions have been made permanent.
Trump Tax Change Proposal Summary
- Individual tax brackets to go from the current 7 tax brackets to just 3 including 12%, 25%, and a top rate of 33%.
- Itemized deductions will be limited to charity and mortgage interest and capped at $100,000 for individual and $200,000 for joint filers, with a full deduction for health insurance premiums and child care costs.
- Businesses will be taxed at a flat 15% tax rate but will likely lose a lot of tax incentives and deductions.
- The Affordable Healthcare Act (Obamacare), Alternative Minimum Tax (AMT), Net Investment Income Tax (NIT), and Gift & Estate Taxes will be repealed.
We here at the firm wish you and your families a very Happy Holiday Season and a Wonderful New Year 2017. Please do not hesitate to call us if you would like to discuss the specific tax savings you could realize from implementing the above ideas or if you would like us to assist you with your year-end projection.