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Tax Strategies & Credits

Time is Really Running Out for Year-End Tax Planning Moves

by
Spencer Wilson
on
12/27/2016
Time is Really Running Out for Year-End Tax Planning Moves

With the holiday season behind us and the New Year upon us, that can only mean one thing: time to start working on our 2016 taxes. Even though the tax year is almost over, there are still plenty of strategies that you can put in place to make sure that you are saving as much as possible and have used all of the tools that the tax laws allow. Every taxpayer's situation is unique, and not everybody is able to take all of the withdrawals or deductions that are available. Still, as you think about your New Years' resolutions and plan for the year ahead, it's a good idea to make sure that you are well positioned, not only to save where you can, but also to avoid any fines or penalties that may arise as a result of steps that you forgot to take.

Optimize Your Use of Education Tax Credits

Taxpayers who qualify for the Lifetime Learning education credit, as well as the American Opportunity credit, are able to optimize their use of the education tax credits by paying some of their 2017 tuition bills ahead of time. If you qualify and find that your 2016 tuition and related expense payments have not taken you to the maximum for the year, you can prepay and count 2017 bills towards the previous tax year for any academic period that starts by the end of March. This is more likely to help those who have only paid tuition bills for the previous fall then those who have paid for an entire year's worth of tuition.

Switch Up Your IRA

If your 2016 income was extremely low and you are holding on to a traditional IRA, you may be able to convert it to a Roth IRA. Doing so is likely to significantly lower the amount of tax that you need to pay.

Pay Your Minimum Required Distribution to Avoid Paying Penalties

Everything changes as you get older, and that includes how you handle your IRA or qualified retirement plan. Where you were once able to just hold it and let it grow, once you reach the age of 70.5 the Internal Revenue Service requires you to take a minimum amount of money out every year. This is known as the minimum required distribution, and if you don't pay attention to the rules, you'll end up having to pay a penalty. There is a slight grace period for those who are first falling into this category – if you turned 70.5 in 2016 you have until the end of the first quarter of 2017 to get your payment in. Unfortunately, you will still have to take a distribution for the new year during the new year (and for each year thereafter in that tax year), so if you missed making your 2016 payment last year, for this first year you'll end up having to take a distribution twice. Failing to do so by the end of the year will mean you'll automatically be subject to paying the MRD penalty.

Charitable Deduction

Giving to charity can do more than helping a worthy cause – it can also reduce your tax burden if you itemize your taxes. One strategy that works particularly well for those who are not able to itemize every year, or who often find themselves falling just short of being able to, is to anticipate your charitable giving for the year that's coming and to give it at the end of the tax year. In other words, you can give your favorite charity the money that you would have given in 2017 while we are still in 2016 and count it against your 2016 taxes, thus boosting your deduction and providing you with a greater opportunity to itemize for this tax year. Then in 2018 you can do it again, anticipating and donating your 2019 charitable contribution at the end of 2018 so that you can itemize again that year. The other strategy that will allow you to optimize your charitable deduction works specifically for those who are required to make a required minimum distribution: you can direct that required distribution directly as a charitable contribution, thus allowing you to minimize your taxable income.

Make Sure You are Taking Full Advantage of Your Health Savings Account

Those who are eligible to contribute into a Health Savings Account should check to make sure that they have contributed the maximum amount allowed per year, as even those who became eligible at the end of the year are able to take the full amount as a deduction.

Take Deductions for Prepayments of 2017 Taxes

In addition to being able to take a deduction for the amount that you pay in state income taxes and property taxes, those are itemize their deductions and who are not subject to the AMT are also able to prepay some of their 2017 taxes and deduct those as well. In much the same way that you are able to optimize education credits by paying any due for the first quarter of 2017 during 2016, you can pay your first installment on 2017 taxes in 2016 and deduct them from your 2016 taxes. If you are self-employed, simply send in the taxes for the first quarter before December 31st; if you are a W-2 employee, ask your employer to boost your state withholding.

Optimize Your Dental and Medical Bills by Paying Them Off

If you have a medical or dental bill that you are paying off over time, or even a procedure that you're holding off on having, it may make sense to schedule it for this year or pay off your bill before December 31st. That's because taxpayers who itemize are able to deduct those expenses if they go over 10% of their adjusted gross income, and if the expenses that you've already paid put you close to that threshold, then paying your bills off or speeding up your scheduling may be what it takes to put you over the top. If you're going to do this, there are a few things that you need to know: first, eyeglasses count, and so does dental work. Second, if you or your spouse are over the age of 65, for tax year 2016 the threshold limit for adjusted gross income is actually 7.5% this year, then goes up to 10% in 2017. Finally, if this is something that sounds like it might work for you, be sure to take the time to do a little math, as there's a chance that what you're saving in the deduction might not be worth it if it means that you're going to be paying more in interest in order to accomplish it.

Reduce Taxable Income with the Annual Gift Tax Exemption

Every year, taxpayers are able to reduce the amount of their tax burden by giving money to the people in their lives. This is because there is an annual gift tax exemption that allows you to provide (in 2016) up to $14,000 to as many people as you want, and the money is not taxable. This is not the same as taking a tax deduction, and the gift (or gifts if giving to more than one person) must be given by December 31st of 2016 in order to be taken for the 2016 tax year: there is no carry over.

Double Check to Make Sure You're Not Short on What You've Paid

Whether you are a W-2 employee whose employer withholds your taxes or are self-employed taxpayer, you have a responsibility to pay the government the right amount of taxes throughout the course of the year. Failure to do this can mean being stuck with a penalty for underpayment, and that's billed on a quarterly basis. You can mitigate the damage and reduce the amount that you owe by checking the payments that you've made each quarter, and if you've fallen short make up for it now. Because the calculations are done quarterly – and the withholding is considered to be paid ratably throughout the year, bumping up the amount you pay in the fourth quarter can eliminate a lot of the pain you'd be facing otherwise.

There's a lot of information here, and it can be hard to tell which, if any, of these opportunities will work for you without the help of a qualified tax professional.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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