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2016 Year End Tax Planning

Many individuals are making plans for autumn and the year-end holidays. Not to be overlooked should be year-end tax planning. Every individual can develop a year-end tax planning strategy that reflects his or her situation. Our office can help you prepare such a strategy, and the earlier we get started, the greater the potential maximization of benefits.


Traditional Year-End Considerations


A number of traditional year-end tax planning strategies may be helpful in maximizing tax savings, depending upon your overall tax situation anticipated for the rest of 2016 and estimated for 2017. These include:

* Receive bonuses after December

* Coordinate capital losses against the sale of appreciated assets

* Postpone the redemption of U.S. Savings Bonds

* Delay Roth conversions until 2017

* Minimize retirement distributions

* Defer billing and collections

* Bunch itemized deductions into 2016/Standard deduction into 2017

* Accelerate bill payments into 2016

* Pay last state estimated tax installment in 2016

* Postpone economic performance

* Minimize AGI limitations on deductions/credits

* Watch net investment interest restrictions

* Match passive activity income and losses

* Make tax-free gifts of $14,000 per recipient ($28,000 for married couples)


NII Tax, Capital Gains/Dividends, AMT, and More


Higher-income individuals should also anticipate possible liability for the 3.8 percent net investment income (NII) tax calculated on net investment income in excess of modified adjusted gross income (MAGI). Threshold MAGI amounts for the NII tax are: $250,000 in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return; and $200,000 in any other case. These threshold amounts are not indexed for inflation. Keeping income below the thresholds is an avenue to explore. Spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are possible approaches. Of course, every taxpayer’s situation is different and planning for the NII tax requires a very personalized strategy. Our office can help you develop a personalized response.


The tax rate on net capital gain is no higher than 15% for most taxpayers. Net capital gain may be taxed at 0% for taxpayers in the 10% or 15% ordinary income tax brackets. However, a 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the 39.6% ordinary tax rate.


Keep in mind the “wash sale rules” when reviewing year-end capital gains and dividends. Wash sales are sales of stock or securities in which losses are realized, but not recognized for tax purposes, because the seller acquires substantially identical stock or securities within 30 days before or after the sale. Nonrecognition, however, applies only to losses; gains are recognized in full.


Like the NII tax, the alternative minimum tax (AMT) also requires personalized attention. The AMT is now permanently “patched” and this has brought some certainty to AMT planning. The patch permanently increases the exemption amounts and indexes the exemption amounts for inflation. For 2015, the exemption amounts are $53,900 for single individuals and heads of household; $83,800 for married couples filing a joint return and surviving spouses; and $41,900 for married couples filing separate returns.


There are steps that taxpayers subject to AMT can take to reduce its effect on their tax liability. For instance, taxpayers can undertake to eliminate certain tax preferences. Certain deductions, including the accelerated depreciation deduction on real property, as well expensed research and development costs and expensed mining exploration and development costs, are tax preference items only to the extent that they exceed an otherwise allowable deduction. In addition, a taxpayer should avoid exercising any incentive stock options in the year in which he or she is subject to AMT.


Along with NII tax and AMT considerations, year-end planning needs to take in the possible impact of the Pease limitation (named for the member of Congress who introduced the original bill), which reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds an applicable threshold. However, the amount of itemized deductions is not reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded. For 2015, the Pease limitation thresholds are $311,300 for married couples and surviving spouses; $285,350 for heads of households; $259,400 for unmarried taxpayers. Individuals within range of the Pease limitation may want to explore the value of deferring itemized deductions or reducing adjusted gross income.


Related to the Pease limitation is the personal exemption phaseout (PEP). The threshold adjusted gross income amounts for the personal exemption phaseout (PEP) are the same as the threshold amounts for the Pease limitation. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level.


Life Events


Marriage, the birth or adoption of a child, the purchase of a new residence, a change in filing status, retirement, and many more life events impact year-end tax planning. Of course, timing is a factor. In some cases, a life event may be planned; in others, events occur unexpectedly. The possibility of significant changes and/or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income or losses, as well as a change in filing status.


Affordable Care Act


No year-end tax plan can ignore the Affordable Care Act (ACA). The ACA, as the past five years has shown, impacts almost every individual, starting with the requirement to have minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals who may be liable for a shared responsibility payment should carefully review the significant number of exemptions available, which cover many different circumstances. It is also possible to project the amount of any payment. Closely related are changes to the medical expense deduction, health flexible spending arrangements (and similar arrangements), insurance coverage for children, and more. Our office can assist you in both understanding these complex ACA provisions and planning for their impact.


Year-end planning -- as we have highlighted several times-- requires a personalized approach. These are just some of the many considerations to consider when developing a year-end tax planning strategy. Please contact our office for more information.