The end of 2016 is fast approaching. Unlike many prior years, we are not waiting for tax legislation to appear before we start or complete our year-end tax planning. Now is a good time to think about maneuvers which can lower your tax bill.
Year-End Tax Planning Considerations for Individuals
- Harvest losses on stock portfolios while substantially preserving your investment position. For example, you can sell the original stock holding, and then buy back the same security at least 31 days later to establish a new cost basis.
- Review your sources of income to determine if you should postpone income until 2017 and accelerate deductions into 2016. Proper management of income and deductions can have significant impact on tax brackets, allowable credits and other deductions.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you are over 70, consider using required minimum distributions (RMDs) from IRAs to fund contributions to charitable organizations.
- Possible utilization of lower marginal tax brackets to convert traditional IRA funds to Roth IRAs. If you have already converted into Roth IRAs, re-examine current taxable income to determine if re-characterization of the original conversion still makes economic sense.
- If you become eligible in or before December of 2016 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions in 2016.
For ranchers and farmers, review drought declarations which provide opportunities to defer sales of breeding and non-breeding livestock. Extension of the replacement period on breeding livestock is also affected by current drought declarations.
Year-End Tax Planning Considerations for Businesses
- Availability of deduction for equipment purchased up to $500,000 (Section 179)
- Availability of 50% bonus deduction for purchase of new equipment
- Congress created “qualified improvement property,” a class for new nonresidential interior real property now eligible for bonus depreciation. Unlike the qualified leasehold property, improvements do not need to be made pursuant to a lease and do not have to be made to a building more than three years old.
- Possible application of Section 179D deductions for energy-efficient improvements to commercial buildings
- Review retirement plans to determine possible need for amendments to comply with current employment regulations.
- Review form 1099 filing requirements to ensure filing of forms with the Internal Revenue Service before January 31, 2017, to avoid late filing penalties.
- Review company overtime policy to ensure compliance with new regulations.
- Review of Affordable Care Act requirements to provide health insurance to employees and possible form 1095 filing requirements.
Estate and Gift Tax Considerations
- The estate filing exemption for 2016 is $5,450,000 per person. Estates excess of the applicable exclusion are taxed at a rate of 40%.
- Make gifts utilizing the annual gift exclusion of $14,000 per person per year to potentially save on gift and estate taxes.
- Portability of the unused exemption is an option available at death of first married spouse.
- South Dakota enacted the Community Property Special Spousal Trust on July 1, 2016. This is a new and powerful estate valuation tool to increase the basis of property at the date of death of the first spouse.
- Consider Charitable Lead Trusts in this low interest environment.
- Consider how proposed Section 2704 regulations could affect intrafamily valuation discounts and related planning.
Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain investment income and the additional 0.9% Medicare tax on earned income.
Taking advantage of planning opportunities can provide significant impact on your 2016 tax liability. Make sure you contact your Ketel Thorstenson advisor today to schedule a review of your current tax position.